Proposed Rule2021-25420
Proxy Voting Advice
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 26, 2021
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission (``Commission'') is proposing amendments to the Federal proxy rules governing proxy voting advice. The Commission is proposing these amendments in light of feedback from market participants on those rules and certain developments in the market for proxy voting advice. The proposed amendments would remove a condition to the availability of certain exemptions from the information and filing requirements of the Federal proxy rules for proxy voting advice businesses. In addition, the proposed amendments would remove a note that provides examples of situations in which the failure to disclose certain information in proxy voting advice may be considered misleading within the meaning of the Federal proxy rules' prohibition on material misstatements or omissions. Finally, the release includes a discussion regarding the application of that prohibition to proxy voting advice, in particular with respect to statements of opinion.
Full Text
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<title>Federal Register, Volume 86 Issue 225 (Friday, November 26, 2021)</title>
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[Federal Register Volume 86, Number 225 (Friday, November 26, 2021)]
[Proposed Rules]
[Pages 67383-67402]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-25420]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-93595; File No. S7-17-21]
RIN 3235-AM92
Proxy Voting Advice
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing amendments to the Federal proxy rules governing proxy voting
advice. The Commission is proposing these amendments in light of
feedback from market participants on those rules and certain
developments in the market for proxy voting advice. The proposed
amendments would remove a condition to the availability of certain
exemptions from the information and filing requirements of the Federal
proxy rules for proxy voting advice businesses. In addition, the
proposed amendments would remove a note that provides examples of
situations in which the failure to disclose certain information in
proxy voting advice may be considered misleading within the meaning of
the Federal proxy rules' prohibition on material misstatements or
omissions. Finally, the release includes a discussion regarding the
application of that prohibition to proxy voting advice, in particular
with respect to statements of opinion.
DATES: Comments should be received by December 27, 2021.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/submitcomments.htm">https://www.sec.gov/rules/submitcomments.htm</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#b9cbccd5dc94dad6d4d4dcd7cdcaf9cadcda97ded6cf"><span class="__cf_email__" data-cfemail="1c6e697079317f7371717972686f5c6f797f327b736a">[email protected]</span></a>. Please include
File Number S7-17-21 on the subject line.
Paper Comments
<bullet> Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-17-21. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
submitted comments on its website (<a href="http://www.sec.gov/rules/proposed.shtml">http://www.sec.gov/rules/proposed.shtml</a>). Typically, comments also are available for website
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE, Washington, DC 20549, on official business days between the
hours of 10 a.m. and 3 p.m. Operating conditions may limit access to
the Commission's public reference room. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information. You should
submit only information that you wish to make publicly available.
Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Valian Afshar, Special Counsel, Office
of Mergers and Acquisitions, Division of Corporation Finance, at (202)
551-3440, U.S. Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing amendments to 17 CFR
240.14a-2 (``Rule 14a-2'') and 17 CFR 240.14a-9 (``Rule 14a-9'') under
the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (``Exchange
Act'').\1\
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\1\ Unless otherwise noted, when we refer to the Exchange Act,
or any paragraph of the Exchange Act, we are referring to 15 U.S.C.
78a of the United States Code, at which the Exchange Act is
codified, and when we refer to rules under the Exchange Act, or any
paragraph of these rules, we are referring to title 17, part 240 of
the Code of Federal Regulations [17 CFR part 240], in which these
rules are published.
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Table of Contents
I. Introduction
II. Discussion of Proposed Amendments
A. Proposed Amendments to Rule 14a-2(B)(9)
1. Background
2. Proposed Amendments
B. Proposed Amendment to Rule 14a-9
1. Background
2. Proposed Amendment
III. Economic Analysis
A. Economic Baseline
1. Affected Parties and Current Market Practices
2. Current Regulatory Framework
B. Benefits and Costs
1. Benefits
2. Costs
C. Effects on Efficiency, Competition, and Capital Formation
D. Reasonable Alternatives
1. Interpretive Guidance or No-Action Relief on Whether Systems
and Processes Satisfy the 2020 Final Rules
2. Exempting Certain Parts of PVABs' Proxy Voting Advice from
Rule 14a-9 Liability
IV. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Incremental and Aggregate Burden and Cost Estimates for the
Proposed Amendments
1. Impact on Affected Parties
2. Aggregate Burden Avoided as a Result of the Proposed
Amendments
3. Increase in Annual Responses Avoided as a Result of the
Proposed Amendments
4. Incremental Change in Compliance Burden for Collection of
Information
5. Program Change and Revised Burden Estimates
V. Small Business Regulatory Enforcement Fairness Act
VI. Initial Regulatory Flexibility Analysis
A. Reasons for, and Objectives of, the Proposed Action
B. Legal Basis
C. Small Entities Subject to the Proposed Amendments
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
VII. Statutory Authority
I. Introduction
The Commission recently adopted final rules regarding proxy voting
advice (the ``2020 Final Rules'') provided by proxy advisory firms, or
proxy voting
[[Page 67384]]
advice businesses (``PVABs'').\2\ The 2020 Final Rules, among other
things, did the following:
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\2\ See Exemptions from the Proxy Rules for Proxy Voting Advice,
Release No. 34-89372 (Jul. 22, 2020) [85 FR 55082 (Sept. 3, 2020)]
(``2020 Adopting Release''). For purposes of this release, we refer
to persons who furnish proxy voting advice covered by 17 CFR
240.14a-1(l)(1)(iii)(A) (``Rule 14a-1(l)(1)(iii)(A)'') as ``proxy
voting advice businesses,'' which we abbreviate as ``PVABs.'' See 17
CFR 240.14a-1(l)(1)(iii)(A). Rule 14a-1(l)(1)(iii)(A) provides that
the terms ``solicit'' and ``solicitation'' include any proxy voting
advice that makes a recommendation to a security holder as to its
vote, consent, or authorization on a specific matter for which
security holder approval is solicited, and that is furnished by a
person that markets its expertise as a provider of such proxy voting
advice, separately from other forms of investment advice, and sells
such proxy voting advice for a fee. Id.
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<bullet> Amended 17 CFR 240.14a-1(l) (``Rule 14a-1(l)'') to codify
the Commission's interpretation that proxy voting advice generally
constitutes a ``solicitation'' subject to the proxy rules.
<bullet> Adopted 17 CFR 240.14a-2(b)(9) (``Rule 14a-2(b)(9)'') to
add new conditions to two exemptions (set forth in 17 CFR 240.14a-
2(b)(1) and (3) (``Rules 14a-2(b)(1) and (3)'')) that PVABs generally
rely on to avoid the proxy rules' information and filing requirements.
Those conditions include:
[cir] New conflicts of interest disclosure requirements in 17 CFR
240.14a-2(b)(9)(i) (``Rule 14a-2(b)(9)(i)''); and
[cir] A requirement in 17 CFR 240.14a-2(b)(9)(ii) (``Rule 14a-
2(b)(9)(ii)'') that a PVAB adopt and publicly disclose written policies
and procedures reasonably designed to ensure that (A) registrants that
are the subject of proxy voting advice have such advice made available
to them at or prior to the time such advice is disseminated to the
PVAB's clients and (B) the PVAB provides its clients with a mechanism
by which they can reasonably be expected to become aware of any written
statements regarding its proxy voting advice by registrants that are
the subject of such advice, in a timely manner before the security
holder meeting (the ``Rule 14a-2(b)(9)(ii) conditions'').
<bullet> Amended the Note to Rule 14a-9, which prohibits false or
misleading statements, to include specific examples of material
misstatements or omissions related to proxy voting advice.
The amendments to Rules 14a-1(l) and 14a-9 became effective on November
2, 2020. The conditions set forth in new Rule 14a-2(b)(9) are set to
become effective on December 1, 2021.\3\
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\3\ Id. at 55122. Institutional Shareholder Services, Inc. has
filed a lawsuit challenging the 2020 Final Rules. See Institutional
Shareholder Services, Inc. v. SEC, No. 1:19-cv-3275-APM (D.D.C.).
That case is currently being held in abeyance until the earlier of
December 31, 2021 or the promulgation of final rule amendments
addressing proxy voting advice. In addition, on October 13, 2021,
the National Association of Manufacturers and Natural Gas Services
Group, Inc. filed a lawsuit arising out of a statement issued by the
Division of Corporation Finance on June 1, 2021 regarding the 2020
Final Rules. See National Association of Manufacturers et al. v.
SEC, No. 7:21-cv-183 (W.D. Tex.); see also infra note 120
(discussing the Division of Corporation Finance's June 1, 2021
statement).
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The 2020 Final Rules were intended to help ensure that investors
who use proxy voting advice receive more transparent, accurate and
complete information on which to make their voting decisions.\4\ The
Commission recognized the ``important and prominent role'' that PVABs
play in the proxy voting process \5\ and adopted the 2020 Final Rules,
in part, to address certain concerns that ``registrants, investors, and
others have expressed . . . about the role of [PVABs].'' \6\ At the
same time, the Commission endeavored to tailor the 2020 Final Rules to
avoid imposing undue costs or delays that could adversely affect the
timely provision of proxy voting advice.\7\
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\4\ 2020 Adopting Release at 55082.
\5\ Id. at 55083 (noting that institutional investors and
investment advisers generally retain PVABs to assist with voting
determinations on behalf of their clients as well as ``other aspects
of the voting process, which for certain investment advisers has
become increasingly complex and demanding over time'').
\6\ Id. at 55085.
\7\ Id. at 55082.
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Since the Commission adopted the 2020 Final Rules, however,
institutional investors and other clients of PVABs have continued to
express strong concerns about the rules' impact on their ability to
receive independent proxy voting advice in a timely manner.
Furthermore, PVABs have continued to develop industry-wide best
practices and improve their own business practices to address the
concerns that were the impetus for the 2020 Final Rules. Accordingly,
we believe it is appropriate to reassess the 2020 Final Rules, solicit
further public comment and, where appropriate, recalibrate the rules to
preserve the independence of proxy voting advice and ensure that PVABs
can deliver advice in a timely manner without ultimately passing on
higher costs to their clients. As described in more detail below, we
are proposing the following changes:
<bullet> Amend Rule 14a-2(b)(9) to remove the Rule 14a-2(b)(9)(ii)
conditions; and
<bullet> Amend Rule 14a-9 to remove Note (e) to that rule, which
sets forth specific examples of material misstatements or omissions
related to proxy voting advice.
These proposed amendments would not affect the other aspects of the
2020 Final Rules, which would remain in place and effective as to PVABs
and their advice. As such, under the proposed amendments, proxy voting
advice would remain a solicitation subject to the proxy rules.
Additionally, in order to rely on the exemptions from the proxy rules'
information and filing requirements set forth in Rules 14a-2(b)(1) and
(3), PVABs would continue to be subject to Rule 14a-2(b)(9)'s conflicts
of interest disclosure requirements. Finally, although the proposed
amendments would remove Note (e) to Rule 14a-9--which was added in the
2020 Final Rules-- material misstatements or omissions of fact in proxy
voting advice would remain subject to liability under that rule. In
this release, however, we discuss the application of Rule 14a-9 to
proxy voting advice, specifically with respect to a PVAB's statements
of opinion.\8\
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\8\ See infra Section II.B.2.
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The proposed amendments do not represent a wholesale reversal of
the 2020 Final Rules. Rather, they are intended to be tailored
adjustments in response to concerns and developments related to
particular aspects of the 2020 Final Rules. The goal of the proposed
amendments is to avoid burdens on PVABs that may impede and impair the
timeliness and independence of their proxy voting advice and subject
them to undue litigation risks and compliance costs, while
simultaneously preserving investors' confidence in the integrity of
such advice. We believe that the proposed amendments, in tandem with
the unaffected portions of the 2020 Final Rules and other existing
mechanisms in the proxy system, including certain policies and
procedures that PVABs have adopted, strike a more appropriate balance.
We welcome feedback and encourage interested parties to submit
comments on any or all aspects of the proposed amendments. When
commenting, it would be most helpful if you include the reasoning
behind your position or recommendation.
II. Discussion of Proposed Amendments
A. Proposed Amendments to Rule 14a-2(b)(9)
1. Background
The 2020 Final Rules amended Rule 14a-2(b) by adding paragraph
(9),\9\ which sets forth two conditions that a PVAB must satisfy in
order to rely on the exemptions in Rules 14a-2(b)(1) and (b)(3) from
the proxy rules' information
[[Page 67385]]
and filing requirements.\10\ Rule 14a-2(b)(9)(i) requires PVABs to
provide their clients with certain conflicts of interest disclosures in
connection with their proxy voting advice.\11\ The Rule 14a-2(b)(9)(ii)
conditions require that PVABs adopt and publicly disclose written
policies and procedures reasonably designed to ensure that (A)
registrants that are the subject of their proxy voting advice have such
advice made available to them at or prior to the time when such advice
is disseminated to the PVABs' clients and (B) the PVABs provide their
clients with a mechanism by which they can reasonably be expected to
become aware of any written statements regarding their proxy voting
advice by registrants who are the subject of such advice, in a timely
manner before the relevant shareholder meeting (or, if no meeting,
before the votes, consents or authorizations may be used to effect the
proposed action).\12\
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\9\ 17 CFR 240.14a-2(b)(9).
\10\ PVABs have typically relied upon the exemptions in Rules
14a-2(b)(1) and (b)(3) to provide advice without complying with the
proxy rules' information and filing requirements. Amendments to
Exemptions from the Proxy Rules for Proxy Voting Advice, Release No.
34-87457 (Nov. 5, 2019) [84 FR 66518 (Dec. 4, 2019)] (``2019
Proposing Release'') at 66525 and n.68. Unless otherwise indicated,
all comments cited and referenced in this release are to public
comments on the rules proposed in the 2019 Proposing Release (the
``2019 Proposed Rules''). Comments on the 2019 Proposed Rules are
available at <a href="https://www.sec.gov/comments/s7-22-19/s72219.htm">https://www.sec.gov/comments/s7-22-19/s72219.htm</a>.
\11\ 17 CFR 240.14a-2(b)(9)(i).
\12\ 17 CFR 240.14a-2(b)(9)(ii). The Commission adopted the Rule
14a-2(b)(9)(ii) conditions, in part, in response to the concerns
expressed by commenters about the ``advance review and feedback''
conditions that the Commission originally proposed. Under the
advance review and feedback conditions in the 2019 Proposed Rules, a
PVAB would have had to, as a condition to relying on the exemptions
in Rules 14a-2(b)(1) and (3), provide registrants and certain other
soliciting persons covered by its proxy voting advice a limited
amount of time to review and provide feedback on the advice before
it is disseminated to the PVAB's clients, with the length of time
provided depending on how far in advance of the shareholder meeting
the registrant or other soliciting person has filed its definitive
proxy statement. See 2019 Proposing Release at 66530-35. These
conditions were among the most contentious features of the 2019
Proposed Rules and drew a significant number of opposing public
comments. 2020 Adopting Release at 55103-07. In response, the
Commission reconsidered its approach and, in the 2020 Final Rules,
adopted the Rule 14a-2(b)(9)(ii) conditions in place of the advance
review and feedback conditions. Id. at 55107-08.
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In addition to those two conditions, Rule 14a-2(b)(9) also sets
forth two non-exclusive safe harbor provisions in paragraphs (iii) and
(iv) that, if met, are intended to give assurance to PVABs that they
have satisfied the conditions of Rules 14a-2(b)(9)(ii)(A) and (B),
respectively.\13\ Further, Rules 14a-2(b)(9)(v) and (vi) contain
exclusions from the Rule 14a-2(b)(9)(ii) conditions.\14\ Those rules
provide that PVABs need not comply with Rule 14a-2(b)(9)(ii) to the
extent that their proxy voting advice is based on a client's custom
voting policy or if they provide proxy voting advice as to non-exempt
solicitations regarding certain mergers and acquisitions or contested
matters.\15\
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\13\ 17 CFR 240.14a-2(b)(9)(iii) and (iv).
\14\ 17 CFR 240.14a-2(b)(9)(v) and (vi).
\15\ Id.
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The Commission adopted Rule 14a-2(b)(9)(ii)(A) to facilitate
effective engagement between PVABs and registrants, help ensure that
registrants are timely informed of proxy voting advice that bears on
the solicitation of their shareholders and further the goal of ensuring
that PVABs' clients have more complete, accurate and transparent
information to consider when making their voting decisions.\16\
Ultimately, the Commission intended that this condition would benefit
the shareholders on whose behalf PVABs' clients may be voting.\17\
Similarly, the Commission adopted Rule 14a-2(b)(9)(ii)(B) as a means of
providing PVABs' clients with additional information that would assist
them in assessing and contextualizing proxy voting advice.\18\ The
Commission intended that this condition would supplement existing
mechanisms--including registrants' ability to file supplemental proxy
materials to respond to proxy voting advice that they may know about
and to alert investors to any disagreements with such advice--so as to
permit clients, including investment advisers voting shares on behalf
of other shareholders, to consider registrants' views along with the
proxy voting advice and before making their voting determinations.\19\
This condition reflected the Commission's views that PVABs' clients
would benefit from more information when considering how to vote their
proxies and that shareholders should have ready access to information
to make informed voting decisions.\20\
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\16\ 2020 Adopting Release at 55109.
\17\ Id.
\18\ Id. at 55112-13.
\19\ Id.
\20\ Id. at 55113.
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We continue to believe that these goals are important, but we also
believe it is appropriate to reassess our policy judgment to adopt the
Rule 14a-2(b)(9)(ii) conditions. We adopted those conditions, in part,
in response to investors who expressed concerns regarding the advance
review and feedback conditions in the 2019 Proposed Rules.\21\
Accordingly, we made adjustments to remove the 2019 Proposed Rules'
advance review condition and replace it with Rule 14a-2(b)(9)(ii)'s
requirement that PVABs make their advice available to registrants at or
prior to the time it is disseminated to their clients.\22\ Investors,
however, have continued to express strong concerns about the Rule 14a-
2(b)(9)(ii) conditions even as modified in the 2020 Final Rules.\23\
Notwithstanding our efforts to adopt somewhat more limited and
principles-based requirements in the 2020 Final Rules, investors have
asserted that the Rule 14a-2(b)(9)(ii) conditions nevertheless will
impose increased compliance costs on PVABs and impair the independence
and timeliness of their proxy voting advice and that such effects are
not justified or balanced by corresponding investor protection
benefits.\24\ This investor opposition is
[[Page 67386]]
evidenced by, among other things, the fact that many clients of PVABs,
predominantly investors, continue to oppose the 2020 Final Rules.
Others, including PVABs themselves, have expressed similar
concerns.\25\
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\21\ Specifically, investors expressed concerns that the 2019
Proposed Rules' advance review and feedback conditions would
adversely affect the independence, cost and timeliness of that
advice. See supra note 12.
\22\ Although the 2020 Final Rules did not include an advance
review requirement, we encouraged PVABs that already were providing
registrants with this opportunity to continue to do so. 2020
Adopting Release at n.339.
\23\ See, e.g., Peter Rasmussen, Divided SEC Passes
Controversial Proxy Advisor Rule, Bloomberg Law (Jul. 29, 2020),
available at <a href="https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-divided-sec-passes-controversial-proxy-advisor-rule">https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-divided-sec-passes-controversial-proxy-advisor-rule</a> (noting
criticism of the 2020 Final Rules by Nell Minow, Vice Chair of
ValueEdge Advisors, that the 2020 Final Rules will make proxy voting
advice ``more expensive and less independent''); Council of
Institutional Investors, Leading Investor Group Dismayed by SEC
Proxy Advice Rules (Jul. 22, 2020), available at <a href="https://www.cii.org/july22_sec_proxy_advice_rules">https://www.cii.org/july22_sec_proxy_advice_rules</a> (``[T]he new rules . . .
seem to effectively require investment advisors who vote proxies on
behalf of investor clients to consider and evaluate any response
from companies to proxy advice before submitting votes. That could
cause significant delays in the already constricted proxy voting
process. It also could jeopardize the independence of proxy advice
as proxy advisory firms may feel pressure to tilt voting
recommendations in favor of management more often, to avoid critical
comments from companies that could draw out the voting process and
expose the firms to costly threats of litigation.''); US SIF, US SIF
Releases Statement On SEC Vote To Regulate Proxy Advisory Firms
(Jul. 22, 2020), available at <a href="https://www.ussif.org/blog_home.asp?display=146">https://www.ussif.org/blog_home.asp?display=146</a> (``Today's vote is a blow to the
independence of research provided by proxy advisors to investors. .
. . The rule will make it more difficult, expensive and time-
consuming for proxy advisors to produce their research.'').
\24\ See supra note 23. In addition, on June 11, 2021, Chair
Gensler and members of the Commission staff met with representatives
from the following organizations: AFL-CIO; AFR; AssuranceMark;
CalPERS; CalSTRS; CFA Institute; Consumer Federation of America;
Council of Institutional Investors; CtW Investment Group; Interfaith
Center on Corporate Responsibility; LACERA; Legal & General; New
York City Comptroller New York State Common; Segal Marco;
Shareholder Rights Group; Sinclair Capital; Sustainable Investments
Institute; T. Rowe Price; The Shareholder Commons; Trillium Asset
Management; US SIF; and ValueEdge Advisors. During that meeting, the
representatives from those organizations expressed general
opposition to the 2020 Final Rules, including with respect to the
Rule 14a-2(b)(9)(ii) conditions. Those representatives expressed
concerns about the costs associated with the 2020 Final Rules,
including the Rule 14a-2(b)(9)(ii) conditions, and the general lack
of corresponding investor protection-based benefits.
\25\ See, e.g., John C. Coffee, Jr., Biden and the SEC: Some
Possible Agendas, The CLS Blue Sky Blog (Dec. 2, 2020), available at
<a href="https://clsbluesky.law.columbia.edu/2020/12/02/biden-and-the-sec-some-possible-agendas/">https://clsbluesky.law.columbia.edu/2020/12/02/biden-and-the-sec-some-possible-agendas/</a> (describing the 2020 Final Rules as
``burdensome'' and predicting that they would ``stretch out the
proxy solicitation process and possibly chill advisers' ability to
recommend policies disliked by managements''); Kurt Schacht & Karina
Karakulova, SEC Proxy Rules Pose Threat To Markets, Shareholders,
Law 360 (Aug. 26, 2020), available at <a href="https://www.law360.com/articles/1302091/sec-proxy-rules-pose-threat-to-markets-shareholders">https://www.law360.com/articles/1302091/sec-proxy-rules-pose-threat-to-markets-shareholders</a>
(``We can only imagine the number of legal challenges, delays and
inefficiency [that the 2020 Final Rules] introduces to a well-
functioning proxy voting process.''); Institutional Shareholder
Services FAQs on July 22, 2020, SEC Rules & Supplemental Guidance
(Aug. 6, 2020), available at <a href="http://images.info.issgovernance.com/Web/ISSGovernance/%7B56ad0ea3-5d24-461e-b9c7-4ba8c6327435%7D_20200914_FAQs_SEC_July-22-2020_Rules_Supplemental_Guidance_FINAL.pdf/">http://images.info.issgovernance.com/Web/ISSGovernance/%7B56ad0ea3-5d24-461e-b9c7-4ba8c6327435%7D_20200914_FAQs_SEC_July-22-2020_Rules_Supplemental_Guidance_FINAL.pdf/</a> (``[I]f the Rules are
upheld, the current lack of clarity around the timing of any
potential responses from the issuers may impact the timing of any
`Alerts' that might be warranted in response to issuers' written
statements. . . . ISS is currently assessing the changes we need to
make to our systems, processes, and staffing in order to accommodate
the new Rules. ISS will be certain to provide advance notice of any
fees we may need to charge to support the changes required by these
regulatory actions.''); Institutional Shareholder Services,
Statement from ISS President & CEO, Gary Retelny, on Today's SEC
Actions (Jul. 22, 2020), available at <a href="https://insights.issgovernance.com/posts/statement-from-iss-president-ceo-gary-retelny-on-todays-sec-actions/">https://insights.issgovernance.com/posts/statement-from-iss-president-ceo-gary-retelny-on-todays-sec-actions/</a> (``Despite seemingly reducing
the previously contemplated burden on proxy advisers, the new rules
. . . will hinder investors' ability to vote in a timely, cost-
effective, and objective manner.''); Minerva Analytics, SEC ignores
investor objections to implement new proxy rules (Jul. 24, 2020),
available at <a href="https://www.manifest.co.uk/sec-ignores-investor-objections-to-implement-new-proxy-rules/">https://www.manifest.co.uk/sec-ignores-investor-objections-to-implement-new-proxy-rules/</a> (``Additional layers of
scrutiny and back-and-forth between proxy advisers, companies and
investment managers would slow down the system and ultimately
increase the cost to those paying for the service.'').
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In addition, we are aware that the largest PVABs have current
practices that could address some of the concerns underlying the Rule
14a-2(b)(9)(ii) conditions. On July 1, 2021, the Independent Oversight
Committee (the ``Oversight Committee'') of the Best Practice Principles
Group (the ``BPPG'') published its first annual report (the ``2021
Annual Report'').\26\ The BPPG is an industry group comprised of six
PVABs, including Glass, Lewis & Co. (``Glass Lewis'') and Institutional
Shareholder Services, Inc. (``ISS''),\27\ the two largest PVABs in the
United States.\28\ Shortly after its formation, the BPPG published the
Best Practice Principles for Providers of Shareholder Voting Research
and Analysis, which consist of three main principles and accompanying
guidance that recommends how the principles should be applied.\29\ The
three principles are (1) service quality, (2) conflicts-of-interest
avoidance or management and (3) communications policy.\30\
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\26\ See Best Practice Principles Oversight Committee, Annual
Report 2021 (Jul. 1, 2021), available at <a href="https://bppgrp.info/wp-content/uploads/2021/07/2021-AR-Independent-Oversight-Committee-for-The-BPP-Group-1.pdf">https://bppgrp.info/wp-content/uploads/2021/07/2021-AR-Independent-Oversight-Committee-for-The-BPP-Group-1.pdf</a> (``2021 Annual Report''). The BPPG was formed in
2014 after the European Securities and Markets Authority requested
that PVABs engage in a coordinated effort to develop an industry-
wide code of conduct focusing on enhancing transparency and
disclosure. Id. at 7.
\27\ Id. The BPPG's six member-PVABs are Glass Lewis, ISS,
Minerva, PIRC, Proxinvest and EOS at Federated Hermes. Id.
\28\ 2020 Adopting Release at 55127.
\29\ 2021 Annual Report at 8.
\30\ Id. at 33-34.
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The Oversight Committee--which is comprised of non-PVAB
stakeholders in proxy voting advice, including representatives from the
institutional investor, registrant and academic communities--is
responsible for reviewing the BPPG member-PVABs' compliance with the
principles.\31\ In the 2021 Annual Report, after reviewing each member-
PVABs' compliance report, the Oversight Committee found all six firms
met the standards established in the three best practices
principles.\32\ Notably:
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\31\ Id. at 7.
\32\ Stephen Davis, First Independent Report on Proxy Voting
Advisory Firm Best Practices (Jul. 14, 2021), available at <a href="https://corpgov.law.harvard.edu/2021/07/14/first-independent-report-on-proxy-voting-advisory-firm-best-practices/">https://corpgov.law.harvard.edu/2021/07/14/first-independent-report-on-proxy-voting-advisory-firm-best-practices/</a>.
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<bullet> Glass Lewis provides the subjects of its proxy voting
advice with its Issuer Data Report (``IDR''), which details the key
facts underlying Glass Lewis' advice, before that advice is finalized
and sent to its clients.\33\ Glass Lewis offers the IDR service to
certain registrants, giving them 48 hours to review the IDR and provide
suggested updates, which are then reviewed by Glass Lewis' research
analysts who in turn make relevant updates and then provide high-level
feedback regarding amendments made.\34\
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\33\ Glass Lewis, Glass Lewis Statement of Compliance for the
Period 1 January 2019 through 31 December 2019 (May 2020), available
at <a href="https://bppgrp.info/wp-content/uploads/2021/03/Glass-Lewis-BPP-Statement.pdf">https://bppgrp.info/wp-content/uploads/2021/03/Glass-Lewis-BPP-Statement.pdf</a> (``Glass Lewis Statement of Compliance'') at 7-8.
\34\ Glass Lewis, Issuer Data Report, available at <a href="https://www.glasslewis.com/issuer-data-report/">https://www.glasslewis.com/issuer-data-report/</a>. In the United States, the
IDR service is available for ``companies listed on the NASDAQ and
NYSE exchanges'' that register for the service with Glass Lewis and
``disclose their meeting documents at least 30 days in advance of
their meeting date.'' Id.
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<bullet> In addition to the IDR's advance review opportunity, Glass
Lewis provides registrants with an opportunity to review and respond to
its proxy voting advice after it has been disseminated to its clients
pursuant to its Report Feedback Service (the ``RFS''). Specifically,
the RFS allows registrants to submit feedback about Glass Lewis' proxy
voting advice and have that feedback delivered directly to Glass Lewis'
clients.\35\ Registrants can access Glass Lewis' proxy voting advice at
the same time it is disseminated to its clients and then, pursuant to
the RFS, submit to Glass Lewis a statement that responds to and
expresses disagreements with, or other opinions regarding, such
advice.\36\ If a registrant submits such a statement, Glass Lewis will
republish its proxy voting advice with that statement attached and
linked on the first page of Glass Lewis' report. Glass Lewis' clients
will receive a notification as soon as the registrant's statement is
available, and clients that have already downloaded an earlier version
of the proxy voting advice will be sent an updated version that
includes the registrant's statement.
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\35\ Glass Lewis Statement of Compliance at 24.
\36\ Glass Lewis, Report Feedback Statement, available at
<a href="https://www.glasslewis.com/report-feedback-statement/">https://www.glasslewis.com/report-feedback-statement/</a>.
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<bullet> In addition, Glass Lewis has a separate process for
registrants to report errors or omissions in its proxy voting advice
and indicates that it reviews any such reported errors or omissions
``immediately.'' \37\ Glass Lewis states that if its proxy voting
advice is updated to reflect new disclosure or the correction of an
error, it notifies all clients that have accessed that advice, or have
ballots in the system for the meeting tied to that advice, whether or
not the updates or revisions affected Glass Lewis' voting
recommendations, as well as the exact nature of those updates and
revisions.\38\
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\37\ Glass Lewis, Report an Error or Omission, available at
<a href="https://www.glasslewis.com/report-error/">https://www.glasslewis.com/report-error/</a>.
\38\ Id.
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<bullet> ISS also detailed in its compliance statement the relevant
processes it has in place.\39\ Significantly, ISS allows any registrant
to request a copy of its proxy voting advice free of charge after such
advice has been disseminated to ISS'
[[Page 67387]]
clients.\40\ Registrants can pre-register to receive proxy voting
advice, and ISS will send those registrants a notification when such
advice is available for them to access.\41\
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\39\ ISS, ISS Compliance Statement (Jan. 11, 2021), available at
<a href="https://bppgrp.info/wp-content/uploads/2021/03/best-practices-principles-iss-compliance-statement-jan-2021-update.pdf">https://bppgrp.info/wp-content/uploads/2021/03/best-practices-principles-iss-compliance-statement-jan-2021-update.pdf</a> (``ISS
Statement of Compliance'').
\40\ Id. at 23.
\41\ ISS, FAQs regarding ISS Proxy Research, available at
<a href="https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276867038-b204d1c3-a920">https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276867038-b204d1c3-a920</a>.
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<bullet> If a registrant believes that ISS' proxy voting advice
contains an error, it can notify ISS either via email or through its
``Help Center'' interface.\42\ ISS states that if it determines that
there is a material error, it will promptly issue an ``Alert'' to
update previously issued proxy voting advice.\43\
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\42\ Id.
\43\ Id.
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<bullet> ISS also stated that it instituted a Feedback Review Board
(``FRB'') to provide a mechanism to all stakeholders to communicate
with ISS regarding its proxy voting advice.\44\ The FRB considers
comments from market constituents regarding the accuracy of ISS'
research and data, policy application and the general fairness of its
policies, research and recommendations.\45\ The FRB focuses on higher-
level feedback and does not address registrant-specific or time-
sensitive feedback.\46\
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\44\ ISS Statement of Compliance at 21.
\45\ Id.
\46\ ISS, Feedback Review Board, available at <a href="https://www.issgovernance.com/contact/feedback-review-board/">https://www.issgovernance.com/contact/feedback-review-board/</a> (noting that
the FRB is ``[a]n ISS body that considers comments from stakeholders
regarding the general fairness of ISS policies and methodologies as
well those related to how we operate as a provider of research,
voting recommendations, corporate ratings, and other solutions and
services to financial market participants'' and that ``[c]omments
should not be company specific nor should they be time-sensitive'').
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<bullet> Instead, ISS has other processes in place for registrants
and other market participants to provide feedback on specific proxy
voting advice (including via the above-described error reporting
processes). For example, ISS noted that it provides draft reports to
registrants in certain markets prior to publication.\47\ Notably, ISS
does not provide draft proxy voting advice to any United States
registrants.\48\ ISS can, however, choose to engage with registrants
during the process of formulating its proxy voting advice.\49\ Some of
that engagement is initiated by ISS, but registrants themselves can
also request engagement with ISS' proxy research teams.\50\
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\47\ ISS Statement of Compliance at 23.
\48\ ISS, FAQs regarding ISS Proxy Research, available at
<a href="https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276867038-b204d1c3-a920">https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276867038-b204d1c3-a920</a> (``In the US, as from January
2021, drafts are no longer provided to U.S. companies including
those in the S&P500 index.'').
\49\ ISS Statement of Compliance at 21-23.
\50\ ISS, FAQs regarding ISS Proxy Research, available at
<a href="https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276867038-b204d1c3-a920">https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276867038-b204d1c3-a920</a> (``ISS' proxy research teams
interact regularly with company representatives, institutional
shareholders, dissident shareholders, sponsors of shareholder
proposals, and other parties in order to gain deeper insight into
many issues and to check material facts relevant to our research. .
. . Sometimes such dialogue is initiated by ISS, while other times
it is initiated by the issuer or other stakeholders (including
shareholders who may or may not be ISS clients).'').
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Finally, although Egan-Jones, the third major PVAB in the United
States,\51\ is not a member of the BPPG, it too appears to have adopted
some policies and procedures that approximate at least a portion of the
Rule 14a-2(b)(9)(ii) conditions. According to Egan-Jones, it provides a
number of ways in which registrants can gain access to its reports and
the models used to create them.\52\ Specifically, Egan-Jones allows
registrants to obtain and review a copy of its proxy voting advice
before such advice is disseminated to its clients.\53\ Registrants can
then notify Egan-Jones of any material errors that they detect in the
proxy voting advice so as to allow Egan-Jones to correct that
advice.\54\
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\51\ 2020 Adopting Release at 55126.
\52\ Egan-Jones, Egan-Jones Proxy Services Issuer Engagement,
available at <a href="https://www.ejproxy.com/issuers/">https://www.ejproxy.com/issuers/</a>.
\53\ Id. (``Issuers may obtain a `draft,' or pre-publication
copy, of their report in order to review it by submitting a fully
completed copy of our Draft Request Form to <a href="/cdn-cgi/l/email-protection#1d746e6e68786f5d78776d6f726564337e7270"><span class="__cf_email__" data-cfemail="5138222224342311343b21233e29287f323e3c">[email protected]</span></a>.'').
\54\ Id. (``If an issuer believes there is a material error in
an EJPS report, they should send a detailed email documenting what
they believe the error to be to <a href="/cdn-cgi/l/email-protection#ed849e9e98889fad88879d9f829594c38e8280"><span class="__cf_email__" data-cfemail="462f353533233406232c3634293e3f6825292b">[email protected]</span></a>.'').
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2. Proposed Amendments
We are proposing to amend Rule 14a-2(b)(9) by deleting paragraph
(ii) and rescinding the Rule 14a-2(b)(9)(ii) conditions. The proposed
amendments would also delete paragraphs (iii), (iv), (v) and (vi) of
Rule 14a-2(b)(9), which contain safe harbors and exclusions from the
Rule 14a-2(b)(9)(ii) conditions.\55\ As discussed above, the Rule 14a-
2(b)(9)(ii) conditions were intended to benefit shareholders by
improving the overall mix of available information so as to allow them
to make more informed voting decisions. While the goal of facilitating
more informed voting decisions remains unchanged, we believe that the
continued concerns expressed by the investors who rely on proxy voting
advice to make their voting decisions warrants a reassessment of the
appropriate means to achieve that goal.
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\55\ Given that the other paragraphs of Rule 14a-2(b)(9) would
all be deleted, the proposed amendments would redesignate the
conflicts of interest disclosure condition set forth in Rule 14a-
2(b)(9)(i) as Rule 14a-2(b)(9). The substance of that condition,
however, would otherwise remain unchanged.
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As part of that reassessment, we have further considered PVABs'
efforts to develop industry-wide practices, as well as improve their
own business practices, that could address the concerns underlying the
Rule 14a-2(b)(9)(ii) conditions. Although these practices differ from
the Rule 14a-2(b)(9)(ii) conditions, the leading PVABs have adopted
policies and procedures that provide their clients and registrants with
some of the opportunities and access to information that would have
been required pursuant to the Rule 14a-2(b)(9)(ii) conditions.
Moreover, because PVABs developed these measures themselves, we believe
they are less likely to adversely affect the independence, cost and
timeliness of proxy voting advice. And, although they are not the
primary basis for these proposed amendments, we do find these industry-
wide practices persuasive in these specific circumstances. This
persuasiveness is due, in part, to the relative salience of a review of
such industry-wide practices given the small number of PVABs in the
U.S.
For example, Glass Lewis' IDR service goes beyond what the Rule
14a-2(b)(9)(ii) conditions would have required and allows registrants
the opportunity to review the research and data on which Glass Lewis
bases its voting recommendations before Glass Lewis disseminates its
proxy voting advice to its clients. The RFS also operates in a similar
manner to what the Rule 14a-2(b)(9)(ii) conditions would have required.
As with the condition in Rule 14a-2(b)(9)(ii)(A), Glass Lewis makes its
proxy voting advice available to registrants, for a fee, at the time
such advice is disseminated to its clients. And, similar to the
condition in Rule 14a-2(b)(9)(ii)(B), Glass Lewis will update its proxy
voting advice to include a registrant's response to its advice and
notify its clients of such response.
ISS also has mechanisms in place that approximate at least a
portion of the Rule 14a-2(b)(9)(ii) conditions. Specifically, ISS makes
its proxy voting advice available to registrants at the time such
advice is disseminated to its clients. Although ISS does not update its
proxy voting advice to incorporate any response a registrant may have
to such advice, it does offer its advice to registrants for free. This
presumably makes it easier for registrants to access ISS' proxy voting
advice and respond to such advice by publishing and filing additional
soliciting materials in a more timely manner. Further, ISS provides its
[[Page 67388]]
clients with access to a registrant's EDGAR filings through the
electronic platform that it uses to deliver its proxy voting advice.
Because any response by a registrant to proxy voting advice is required
to be filed with the Commission as additional soliciting materials,\56\
we believe that the access that ISS provides to its clients to a
registrant's response via its electronic platform addresses many of the
policy concerns underlying the Rule 14a-2(b)(9)(ii) conditions.\57\
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\56\ See 17 CFR 240.14a-6(b).
\57\ This belief is based on our understanding that ISS gives
its clients the option of receiving push notifications via email
from its electronic platform that will notify the clients of any
additional soliciting materials filed by a registrant as to which
those clients have received proxy voting advice.
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We recognize that the mechanisms that these PVABs have in place may
not perfectly replicate the requirements of the Rule 14a-2(b)(9)(ii)
conditions or result in the same investor-oriented benefits that those
conditions were intended to produce. These mechanisms are, in some
ways, broader than the requirements of the Rule 14a-2(b)(9)(ii)
conditions.\58\ They also are, in other ways, more limited.\59\
Furthermore, although some of the above-described mechanisms were
developed after the Commission adopted the 2020 Final Rules,\60\ we
acknowledge that others were in place and considered by the Commission
at the time it adopted the 2020 Final Rules.\61\ Finally, we recognize
that although the three major United States-based PVABs have some
promising mechanisms in place, those mechanisms differ across the three
PVABs, and, absent the Rule 14a-2(b)(9)(ii) conditions, there is no
assurance that a new entrant to the PVAB market will adopt similar
mechanisms or that existing PVABs will maintain them.
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\58\ For example, both Glass Lewis, through the IDR service, and
Egan-Jones allow registrants opportunities to review at least a
portion of their proxy voting advice before it is disseminated to
their clients. In addition, although the Rule 14a-2(b)(9)(ii)
conditions would have applied only to registrants, Glass Lewis makes
the RFS available to both registrants and shareholder proponents.
Glass Lewis, Report Feedback Statement, available at <a href="https://www.glasslewis.com/report-feedback-statement/">https://www.glasslewis.com/report-feedback-statement/</a> (``Any company or
shareholder proponent that purchases a Glass Lewis report will now
automatically have the right to submit an RFS at no extra cost.'').
\59\ For example, ISS and Egan-Jones' public descriptions of
their relevant services do not indicate whether they will notify
their clients of any response to their proxy voting advice by a
registrant. In addition, although ISS provides a copy of its proxy
voting advice to registrants for free, it does not allow registrants
to share that advice with any external parties, including its
attorneys, proxy solicitors and compensation consultants. ISS, FAQs
regarding ISS Proxy Research, available at <a href="https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276867038-b204d1c3-a920">https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276867038-b204d1c3-a920</a> (``Our final, published proxy research
reports are provided to companies free of charge as a courtesy,
subject to the following conditions: (i) the reports are only for
the subject company's internal use by employees of the company, and
(ii) the company is expressly prohibited from making the report, or
any part of it, public, or sharing the reports, profiles or login
credentials with any external parties (including but not limited to
any external advisors retained by the company such as a law firm,
proxy solicitor or compensation consultant).''). These restrictions
may inhibit a registrant's ability to adequately respond to ISS'
proxy voting advice in a manner that would benefit its shareholders.
\60\ Notably, the Oversight Committee convened for the first
time on July 30, 2020 and issued its 2021 Annual Report on July 1,
2021. See 2021 Annual Report at 10.
\61\ See 2020 Adopting Release at 55128-29 (describing Glass
Lewis' IDR service and the RFS and Egan-Jones' advance review
service).
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We have nevertheless decided to reconsider the Rule 14a-2(b)(9)(ii)
conditions because we share the concerns that PVABs' clients and others
continue to express about the conditions' potential adverse effects on
the independence, cost and timeliness of proxy voting advice.\62\ We
have also taken notice of the efforts by PVABs to develop industry-wide
standards, including the Oversight Committee's assessment of its
members' compliance with the BPPG principles in the 2021 Annual Report.
Notwithstanding our prior policy judgment, we believe there are market-
based incentives for PVABs to adopt and maintain policies and
procedures that provide some of the same benefits as those of the Rule
14a-2(b)(9)(ii) conditions without raising the concerns investors have
expressed about those conditions. We believe that rescinding the Rule
14a-2(b)(9)(ii) conditions would give PVABs, investors and registrants
the flexibility to select mechanisms that best serve the needs of
investors and other stakeholders and adapt to evolving market
practices. Furthermore, our continued observance of these mechanisms in
practice, including during the 2021 proxy season, has given us
additional confidence in their efficacy. Thus, although these
mechanisms are not the primary basis for the proposed amendments, we do
consider them to be relevant.
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\62\ See supra notes 23-25 and accompanying text.
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Because our proposed amendments to Rule 14a-2(b)(9) are based, in
part, on our evaluation of the current state of the PVAB market, we
will continue to monitor that market to help ensure that investors are
adequately protected and have ready access to information that allows
them to make informed voting decisions. To the extent that there are
changes in the quality of PVABs' policies and procedures or new
entrants to the PVAB market that do not adopt policies and procedures
consistent with best practices, we will reevaluate the state of the
PVAB market and consider whether further action should be taken.
Request for Comment
1. Should we amend Rule 14a-2(b)(9) as proposed to rescind the Rule
14a-2(b)(9)(ii) conditions? Would such a rescission help facilitate the
provision of timely and independent proxy voting advice? Alternatively,
rather than rescinding the Rule 14a-2(b)(9)(ii) conditions as proposed,
should we commit to a retrospective review of the Rule 14a-2(b)(9)(ii)
conditions after they have become effective? If so, what is the
appropriate period of time after which we should conduct such review?
What would be the potential drawbacks of conducting such a
retrospective review?
2. Are the existing mechanisms in the proxy system, including the
role played by the BPPG and the Oversight Committee and the policies
and procedures that PVABs have in place, sufficient to obviate the need
for the Rule 14a-2(b)(9)(ii) conditions? Are there other relevant
existing mechanisms in the proxy system that the Commission should
consider?
3. How might we address the risk that PVABs will change their
policies and procedures to the detriment of investors if we rescind the
Rule 14a-2(b)(9)(ii) conditions? How might we address the risk that,
absent the Rule 14a-2(b)(9)(ii) conditions, new entrants to the PVAB
market will not be properly incentivized to adopt policies and
procedures that approximate those conditions?
4. Are there ways that we can mitigate the potential adverse
effects on proxy voting advice associated with the Rule 14a-2(b)(9)(ii)
conditions other than by rescinding those conditions?
5. Have registrants or others relied on the Commission's adoption
of the Rule 14a-2(b)(9)(ii) conditions? How, and to what extent, should
any such reliance interests factor into the Commission's determination
of whether to rescind those conditions?
6. Should we also reconsider the Supplement to Commission Guidance
Regarding Proxy Voting Responsibilities of Investment Advisers that the
Commission issued in connection with the 2020 Final Rules? Because that
supplemental guidance was prompted, in part, by the Rule 14a-
2(b)(9)(ii) conditions, will the guidance be useful if the Rule 14a-
2(b)(9)(ii) conditions are rescinded? Should the guidance be rescinded
concurrently with the Rule 14a-2(b)(9)(ii) conditions? Should it
instead be revised, and, if so, how? Notwithstanding the proposed
rescission of the Rule 14a-2(b)(9)(ii) conditions, are there aspects of
the
[[Page 67389]]
supplemental guidance that should be clarified?
B. Proposed Amendment to Rule 14a-9
1. Background
Before adopting the 2020 Final Rules, the Commission, in August
2019, issued an interpretation and guidance that clarified the
application of the Federal proxy rules to the provision of proxy voting
advice (the ``Interpretive Release'').\63\ In the Interpretive Release,
the Commission explained that the determination of whether a
communication is a solicitation for purposes of Section 14(a) of the
Exchange Act depends upon the specific nature, content and timing of
the communication and the circumstances under which the communication
is transmitted.\64\ The Commission stated that PVABs' proxy voting
advice generally would constitute a solicitation subject to the proxy
rules.\65\ As a solicitation, proxy voting advice is subject to Rule
14a-9. Rule 14a-9 ``prohibits any solicitation from containing any
statement which, at the time and in the light of the circumstances
under which it is made, is false or misleading with respect to any
material fact.'' \66\ The rule also requires that solicitations ``must
not omit to state any material fact necessary in order to make the
statements therein not false or misleading.'' \67\ The Commission noted
that although PVABs may rely on exemptions from the proxy rules'
information and filing requirements, even these exempt solicitations
remain subject to Rule 14a-9.\68\
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\63\ Commission Interpretation and Guidance Regarding the
Applicability of the Proxy Rules to Proxy Voting Advice, Release No.
34-86721 (Aug. 21, 2019) [84 FR 47416 (Sept. 10, 2019)]
(``Interpretive Release'').
\64\ Id. at 47417-19.
\65\ Id.
\66\ Id. at 47419.
\67\ Id.
\68\ Id.
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In the adopting release for the 2020 Final Rules, the Commission
codified the guidance set forth in the Interpretive Release that proxy
voting advice is generally subject to Rule 14a-9.\69\ The 2020 Final
Rules amended Rule 14a-9 by adding paragraph (e) to the Note to that
rule. Paragraph (e) sets forth examples of what may, depending on the
particular facts and circumstances, be misleading within the meaning of
Rule 14a-9 with respect to proxy voting advice. Specifically, Note (e)
to Rule 14a-9 provides that the failure to disclose material
information regarding proxy voting advice, ``such as the [PVAB's]
methodology, sources of information, or conflicts of interest'' could,
depending upon particular facts and circumstances, be misleading within
the meaning of the rule. In adopting these amendments, the Commission
noted that ``[t]he ability of a client of a [PVAB] to make voting
decisions is affected by the adequacy of the information it uses to
formulate such decisions'' and stated that the amendments ``are
designed to further clarify the potential implications of Rule 14a-9
for proxy voting advice specifically, and to help ensure that [PVABs']
clients are provided with the material information they need to make
fully informed decisions.'' \70\
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\69\ 2020 Adopting Release at 55121.
\70\ Id.
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Although commenters on the 2019 Proposed Rules expressed concern
that the changes to Rule 14a-9 could heighten the litigation risk for
PVABs, the Commission stated that the 2020 Final Rules were not
intended to change the application or scope of Rule 14a-9 or create a
new cause of action against PVABs.\71\ The Commission also stated that
the amendments do ``not make `mere differences of opinion' actionable
under Rule 14a-9.'' \72\ Instead, the amendments were intended to
clarify ``what has long been true about the application of Rule 14a-9
to proxy voting advice and, more generally, proxy solicitations as a
whole: No solicitation may contain any statement which, at the time and
in light of the circumstances under which it is made, is false or
misleading with respect to any material fact, or which omits to state
any material fact necessary in order to make the statements therein not
false or misleading.'' \73\
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\71\ Id.
\72\ Id. The Commission also stated that ``differences of
opinion are not actionable under the final amendment to Rule 14a-
9.'' Id. at n.443.
\73\ Id.
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Despite these Commission statements regarding the intent of the
2020 Final Rules' amendments to Rule 14a-9, PVABs, their clients and
other investors continue to express concerns and uncertainty regarding
the extent of PVABs' liability under Rule 14a-9.\74\ PVABs continue to
assert that the amendments may increase their litigation risks, thereby
increasing their costs, which, ultimately, may be passed along to their
clients.\75\ These parties indicate that those litigation risks could
also impair the independence and quality of PVABs' proxy voting advice
if, for example, registrants use the threat of litigation to pressure
PVABs to make their proxy voting advice more favorable to such
registrants. Further, PVABs and their clients remain concerned that
Rule 14a-9 claims may be available for registrants who disagree with
their proxy voting advice. Such disagreements could pertain not only to
PVABs' voting recommendations, but also to the specific methodology,
analysis and information that PVABs use to formulate their
recommendations.
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\74\ See supra notes 23-25 (citing to concerns that investors
and others have expressed regarding the 2020 Final Rules, including
the amendment to Rule 14a-9). In addition, because of the large
similarities between the proposed amendment to Rule 14a-9 in the
2019 Proposed Rules and the amendment to Rule 14a-9 adopted in the
2020 Final Rules, we also consider some of the comment letters that
expressed concerns regarding the proposed amendment to be relevant
for purposes of evaluating the ongoing concerns regarding Note (e)
to Rule 14a-9, as adopted. See comment letters from Carl C. Icahn
(Feb. 7, 2020), Marcie Frost, Chief Executive Officer, CalPERS (Feb.
3, 2020), Rob Collins, Council for Investor Rights and Corporate
Accountability (Feb. 3, 2020), Richard B. Zabel, General Counsel and
Chief Legal Officer, Elliott Management Corporation (Jan. 31, 2020),
Kevin Cameron, Executive Chair, Glass Lewis (Feb. 3, 2020), and Gary
Retelny, CEO, ISS (Jan. 31, 2020).
\75\ Id.
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2. Proposed Amendment
As explained in the release adopting the 2020 Final Rules, the
Commission's position is that proxy voting advice is a ``solicitation''
and, as such, is subject to Rule 14a-9's prohibition against material
misstatements and omissions.\76\ We recognize, however, that PVABs,
their clients and other investors continue to express concerns that the
2020 Final Rules' amendments to Rule 14a-9 may extend liability to mere
differences of opinion regarding the proxy voting advice.\77\ These
differences of opinion could include disagreements regarding the
substance of a PVAB's voting recommendations (e.g., a registrant's
disagreement with a PVAB's recommendation that shareholders vote
against a director nominee recommended by the board) or the appropriate
analysis, methodology or information that the PVAB should use to
formulate its voting recommendations (e.g., a disagreement between a
registrant and a PVAB regarding the appropriate peer companies for a
particular analysis). These parties have also expressed concerns that a
PVAB could be liable under Rule 14a-9 solely because it declined to
accept a registrant's suggested revisions or corrections to its proxy
voting advice.\78\ In their view, these uncertainties unnecessarily
increase the litigation risk to PVABs and impair the independence
[[Page 67390]]
of the proxy voting advice that investors use to make their voting
decisions.
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\76\ 2020 Adopting Release at 55093-94.
\77\ See supra notes 23-25.
\78\ Id.; see also comment letter from Gary Retelny, CEO, ISS
(Jan. 31, 2020).
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In light of these concerns, we are proposing to delete Note (e) to
Rule 14a-9. As discussed above, Note (e) sets forth examples of what
may, depending on the particular facts and circumstances, be misleading
within the meaning of Rule 14a-9 with respect to proxy voting advice.
Although Note (e) was intended to clarify the potential implications of
Rule 14a-9 for proxy voting advice under existing law, it appears
instead to have unintentionally created a misperception that the
addition of Note (e) to Rule 14a-9 purported to determine or alter the
law governing Rule 14a-9's application and scope, including its
application to statements of opinion.\79\ The proposed deletion of Note
(e) is intended to address that misperception and thereby reduce any
resulting uncertainty that could lead to increased litigation risks or
the threat of litigation and impaired independence of proxy voting
advice.
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\79\ See supra note 74 and accompanying text.
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At the same time, we believe it may be helpful to briefly clarify
our understanding of the limited circumstances in which a PVAB's
statement of opinion may subject it to liability under Rule 14a-9. A
PVAB, like any other person engaged in solicitation, may, depending on
the facts and circumstances, be subject to liability under Rule 14a-9
for a materially misleading statement or omission of fact, including
with regard to its methodology, sources of information or conflicts of
interest. That conclusion would not be altered by virtue of our
proposed deletion of Note (e). We recognize, however, that the
formulation of proxy voting advice often requires subjective
determinations and exercise of professional judgment. We do not
interpret Rule 14a-9 to subject PVABs to liability for such
determinations simply because a registrant holds a differing view.
Our conclusion that Rule 14a-9 liability cannot rest on mere
differences of opinion is supported by the Supreme Court's decisions in
Omnicare, Inc. v. Laborers District Council Construction Industry
Pension Fund \80\ and Virginia Bankshares, Inc. v. Sandberg.\81\ As
noted above, Rule 14a-9 prohibits misstatements or omissions of
``material fact.'' In Omnicare, the Court explained that ``a sincere
statement of pure opinion is not an `untrue statement of material
fact''' even if the belief is wrong.\82\ Thus, to state a claim under
Rule 14a-9, it would not be enough to allege that a PVAB's opinions--
regarding, for example, its determination to select a particular
analysis or methodology to formulate its voting recommendations or the
ultimate voting recommendations themselves--were wrong.\83\
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\80\ 575 U.S. 175 (2015).
\81\ 501 U.S. 1083 (1991). While Omnicare involved claims
brought under Section 11 of the Securities Act of 1933, we believe
its discussion of the circumstances in which a statement of opinion
may be actionable under that provision applies to Rule 14a-9. See
Omnicare, 575 U.S. at 185 n.2 (noting that Rule 14a-9 ``bars conduct
similar to that described in Sec. 11''); see also, e.g., Golub v.
Gigamon, Inc., 994 F.3d 1102 (9th Cir. 2021) (holding that the
Omnicare standards apply to claims under Rule 14a-9); Paradise Wire
& Cable Defined Benefit Pension Plan v. Weil, 918 F.3d 312, 322-23
(4th Cir. 2019) (applying the Omnicare standards to claims under
Rule 14a-9).
\82\ 575 U.S. at 186.
\83\ Id. at 194.
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As the Court explained in Omnicare, there are three ways in which a
statement of opinion may be actionable as a misstatement or omission of
material fact. First, every statement of opinion ``explicitly affirms
one fact: That the speaker actually holds the stated belief.'' \84\
Thus, a PVAB may be subject to liability under Rule 14a-9 for a
statement of opinion that ``falsely describe[s]'' its view as to the
voting decision that it believes the client should make.\85\ Second, a
statement of opinion may contain ``embedded statements of fact'' which,
if untrue, may be a source of liability under Rule 14a-9.\86\ And
third, ``a reasonable investor may, depending on the circumstances,
understand an opinion statement to convey facts about how the speaker
has formed the opinion--or, otherwise put, about the speaker's basis
for holding that view.'' \87\ A PVAB's statement of opinion may thus
give rise to liability if it ``omits material facts about the [PVAB's]
inquiry into or knowledge concerning [the] statement'' and ``those
facts conflict with what a reasonable investor would take from the
statement itself.'' \88\
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\84\ Id. at 184.
\85\ Id.; see also Virginia Bankshares, 501 U.S. at 1092, 1095.
For example, if a speaker states the belief that a company has the
highest market share, while knowing that the company in fact has the
second highest market share, that statement of belief would be an
``untrue statement of fact'' about the speaker's own belief.
\86\ Omnicare, 575 U.S. at 185-86; see also Virginia Bankshares,
501 U.S. at 1092, 1095. For example, in stating its opinion that
shareholders should vote for a particular director-candidate, a PVAB
may support that opinion by reference to that candidate's prior
professional experience. Those descriptions of the candidate's
professional experience would be statements of fact potentially
subject to liability under Rule 14a-9, notwithstanding the context
in which they were made (i.e., as support for a statement of
opinion).
\87\ Omnicare, 575 U.S. at 188.
\88\ Id. at 189. In Omnicare, the court offered the example of
``an unadorned statement of opinion about legal compliance: `We
believe our conduct is lawful.''' Id. at 188. The court noted that
``[i]f the issuer makes that statement without having consulted a
lawyer, it could be misleadingly incomplete.'' Id. This example can
also be applied to a PVAB's proxy voting advice if, for example, it
makes a statement of opinion regarding the legality of a
registrant's proposal or corporate action without having consulted a
lawyer.
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Omnicare and Virginia Bankshares support our view that neither mere
disagreement with a PVAB's analysis, methodology or opinions, nor a
bare assertion that a PVAB failed to reveal the basis for its
conclusions, would suffice to state a claim under Rule 14a-9. Rather, a
litigant ``must identify particular (and material) facts'' indicating a
misstatement or omission of a material fact that renders a PVAB's
statements misleading in one of the three senses above--which, the
Supreme Court noted, is ``no small task.'' \89\ As such, a PVAB would
not face liability under Rule 14a-9 for exercising its discretion to
rely on a particular analysis, methodology or set of information--while
relying less heavily on or not adopting alternative analyses,
methodologies or sets of information, including those advanced by a
registrant or other party--when formulating its voting recommendations.
Similarly, a PVAB would not face liability under Rule 14a-9, for
example, simply because it did not accept a registrant's suggested
revisions to its proxy voting advice concerning such discretionary
matters. Instead, a PVAB's potential liability under Rule 14a-9 turns
on whether its proxy voting advice contains a material misstatement or
omission of fact.\90\
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\89\ Id. at 194. We further note that both Omnicare and Virginia
Bankshares were cases against registrants; we are not aware of any
enforcement actions or private lawsuits against a PVAB based on
statements of opinion in connection with proxy voting matters.
\90\ This release does not address any duties or liabilities
that a PVAB may have under the Investment Advisers Act of 1940, as
applicable.
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Request for Comment
7. Should we amend Rule 14a-9 as proposed to remove Note (e)?
Should we modify the Note instead of deleting it? If so, how should the
Note be modified? Rather than rescinding or amending Note (e), should
we instead commit to conducting a retrospective review of Note (e)
after a given period of time? If so, what is the appropriate amount of
time after which we should conduct such review? What would be the
potential drawbacks of conducting such a retrospective review?
8. Has the addition of Note (e) to Rule 14a-9 improved the quality
or integrity of proxy voting advice? Is there a risk
[[Page 67391]]
that PVABs will change their policies and procedures to the detriment
of investors if the Commission adopts the proposed amendments to Rule
14a-9? Are there any other adverse consequences associated with the
removal of Note (e) to Rule 14a-9?
9. Has the addition of Note (e) to Rule 14a-9 resulted in increased
litigation for PVABs? Have PVABs experienced an increase in litigation
costs or credible threats of litigation since the adoption of the 2020
Final Rules? Have there been any other adverse consequences associated
with the addition of Note (e) to Rule 14a-9?
10. We have set forth our understanding of the scope of Rule 14a-9
liability in the context of proxy voting advice. Are there other ways
we could address concerns about potential increased litigation risks to
PVABs and impairment of the independence of proxy voting advice? For
example, should we amend Rule 14a-9 to codify this understanding?
Alternatively, should we exempt all or parts of proxy voting advice
from Rule 14a-9 liability entirely? For example, should we amend Rule
14a-9 to expressly state that a PVAB would not be subject to liability
under that rule for its voting recommendations and any subjective
determinations it makes in formulating such recommendations, including
its decision to use a specific analysis, methodology or information or
its decision as to how to respond to any disagreement a registrant may
have with its proxy voting advice?
III. Economic Analysis
We are proposing amendments to Exchange Act Rule 14a-2(b)(9) to
rescind the Rule 14a-2(b)(9)(ii) conditions. The purpose of these
proposed amendments is to address concerns about the potential adverse
effects of the 2020 Final Rules on the independence, cost and
timeliness of proxy voting advice, while still achieving many of the
intended benefits of the 2020 Final Rules with respect to the quality
of the advice provided to PVABs' clients. We also are proposing an
amendment to Exchange Act Rule 14a-9 to remove paragraph (e) of the
Note to that rule. The purpose of this proposed amendment is to avoid
any misperception that the addition of Note (e) to Rule 14a-9 purported
to determine or alter the law governing that rule's application and
scope, including its application to statements of opinion.
The discussion below addresses the economic effects of the proposed
amendments, including their anticipated costs and benefits, as well as
the likely effects of the amendments on efficiency, competition and
capital formation.\91\ We also analyze the potential costs and benefits
of reasonable alternatives to the proposed amendments. Where
practicable, we have attempted to quantify the economic effects of the
proposed amendments; however, in most cases, we are unable to do so
because either the necessary data is unavailable or certain effects are
not quantifiable. Below, we request comment on our analysis of these
effects as well as data that could help us quantify these effects.
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\91\ Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)] directs
the Commission, when engaging in rulemaking where it is required to
consider or determine whether an action is necessary or appropriate
in the public interest, to consider, in addition to the protection
of investors, whether the action will promote efficiency,
competition, and capital formation. Further, Section 23(a)(2) of the
Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission when
making rules under the Exchange Act, to consider the impact that the
rules would have on competition, and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the
Exchange Act.
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A. Economic Baseline
The baseline against which the costs, benefits and the impact on
efficiency, competition and capital formation of the proposed
amendments are measured consists of the current regulatory requirements
applicable to registrants, PVABs, investment advisers and other clients
of PVABs, as well as current industry practices used by these entities
in connection with the preparation, distribution and use of proxy
voting advice.
The adopting release for the 2020 Final Rules provided an overview
of the role of PVABs in the proxy process, including a discussion of
existing economic research on PVABs and the quality of proxy voting
advice they provide.\92\
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\92\ See 2020 Adopting Release.
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1. Affected Parties and Current Market Practices
a. Proxy Voting Advice Businesses
As of November 2021, to our knowledge, the proxy voting advice
industry in the United States consists of three major firms: ISS, Glass
Lewis and Egan-Jones.
<bullet> ISS, founded in 1985, is a privately held company that
provides research and analysis of proxy issues, custom policy
implementation, vote recommendations, vote execution, governance data
and related products and services.\93\ ISS also provides advisory/
consulting services, analytical tools and other products and services
to corporate registrants through ISS Corporate Solutions, Inc. (a
wholly owned subsidiary).\94\ As of April 2020, ISS had nearly 2,000
employees in 30 locations, and covered approximately 44,000 shareholder
meetings in 115 countries, annually.\95\ ISS states that it executes
about 10.2 million ballots annually on behalf of those clients
representing 4.2 trillion shares.\96\ ISS is registered with the
Commission as an investment adviser and identifies its work as pension
consultant as the basis for registering as an adviser.\97\
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\93\ See U.S. Gov't Accountability Office, GAO-17-47, Report to
the Chairman, Subcommittee on Economic Policy, Committee on Banking,
Housing, and Urban Affairs, U.S. Senate, Corporate Shareholder
Meetings: Proxy Advisory Firms' Role in Voting and Corporate
Governance Practices, 6 (2016), available at <a href="https://www.gao.gov/assets/690/681050.pdf">https://www.gao.gov/assets/690/681050.pdf</a> (``2016 GAO Report'').
\94\ Id.
\95\ See About ISS, available at <a href="https://www.issgovernance.com/about/about-iss">https://www.issgovernance.com/about/about-iss</a>.
\96\ See About ISS, <a href="https://www.issgovernance.com/about/about-iss">https://www.issgovernance.com/about/about-iss</a>.
\97\ See Form ADV filing for ISS, available at: <a href="https://adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=111940">https://adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=111940</a> (last accessed April 23,
2020) (``ISS Form ADV filing''). See also 2016 GAO Report at 9.
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<bullet> Glass Lewis, established in 2003, is a privately held
company that provides research and analysis of proxy issues, custom
policy implementation, vote recommendations, vote execution and
reporting and regulatory disclosure services to institutional
investors.\98\ As of April 2020, Glass Lewis had more than 380
employees worldwide that provide services to more than 1,300 clients
that collectively manage more than $35 trillion in assets.\99\ Glass
Lewis states that it covers more than 20,000 shareholder meetings
across approximately 100 global markets annually.\100\ Glass Lewis is
not registered with the Commission in any capacity.
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\98\ Id. at 7.
\99\ See Glass Lewis Company Overview, available at <a href="https://www.glasslewis.com/company-overview/">https://www.glasslewis.com/company-overview/</a>.
\100\ Id.
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<bullet> Egan-Jones was established in 2002 as a division of Egan-
Jones Ratings Company.\101\ Egan-Jones is a privately held company that
provides proxy services, such as notification of meetings, research and
recommendations on selected matters to be voted on, voting guidelines,
execution of votes and regulatory disclosure.\102\ As of September
2016, Egan-Jones' proxy research or voting clients mostly consisted of
mid- to large-sized mutual funds,\103\ and the firm
[[Page 67392]]
covered approximately 40,000 companies.\104\ Egan-Jones Ratings Company
(Egan-Jones' parent company) is registered with the Commission as a
Nationally Recognized Statistical Ratings Organization.\105\
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\101\ See 2016 GAO Report at 7.
\102\ Id.
\103\ Id.
\104\ Id. While ISS and Glass Lewis have published updated
coverage statistics on their websites, the most recent data
available for Egan-Jones was compiled in the 2016 GAO Report.
\105\ See Order Granting Registration of Egan-Jones Rating
Company as a Nationally Recognized Statistical Rating Organization,
Exchange Act Release No. 34-57031 (Dec. 21, 2007), available at
<a href="https://www.sec.gov/ocr/ocr-current-nrsros.html#egan-jones">https://www.sec.gov/ocr/ocr-current-nrsros.html#egan-jones</a>.
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Of the three PVABs identified, ISS and Glass Lewis are the largest
and most often used for proxy voting advice.\106\ We do not have access
to general financial information for ISS, Glass Lewis and Egan-Jones
such as annual revenues, earnings before interest, taxes, depreciation
and amortization and net income. We also do not have access to client-
specific financial information or more general or aggregate information
regarding the economics of the PVABs.
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\106\ See 2016 GAO Report at 8, 41 (``In some instances, we
focused our review on Institutional Shareholder Services (ISS) and
Glass Lewis and Co. (Glass Lewis), because they have the largest
number of clients in the proxy advisory firm market in the United
States.''). See also letters in response to the SEC Staff Roundtable
on the Proxy Process from Center on Executive Compensation (Mar. 7,
2019) (noting that there are ``two firms controlling roughly 97% of
the market share for such services''); Society for Corporate
Governance (Nov. 9, 2018) (``While there are five primary proxy
advisory firms in the U.S., today the market is essentially a
duopoly consisting of Institutional Shareholder Services . . . and
Glass Lewis & Co. . . . .'').
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As part of our consideration of the baseline for the proposed
amendments, we focus on the industry practice that is particularly
relevant for the proposed amendments to Rule 14a-2(b)(9): The PVABs'
procedures for engagement with registrants. As mentioned above, all
three major PVABs have certain policies, procedures and disclosures in
place intended to assure clients that the proxy voting advice they
receive will be based on accurate, transparent and complete
information.\107\ In some cases, PVABs seek input from registrants to
further these objectives. Glass Lewis and Egan-Jones offer registrants
some form of pre-release review of at least some of their proxy voting
advice reports, or the data used in their reports. ISS does not provide
draft proxy voting advice to any United States registrants, but it
engages with registrants during the process of formulating its proxy
voting advice. Also, all three PVABs offer registrants access to proxy
voting advice after it is distributed to clients, in some cases for a
fee, and offer mechanisms by which registrants can provide feedback on
such advice. In the 2021 Annual Report, after reviewing each member-
PVAB's compliance report, the Oversight Committee found that ISS and
Glass Lewis met the standards established in the three best practices
principles, which include communication with and feedback from
registrants.\108\
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\107\ See supra Section II.A.1.
\108\ See supra Section II.A.1.
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Additionally, it is our understanding that some PVABs currently
provide their clients with notifications of and links to filings by
registrants that are the subject of proxy voting advice in their online
platforms.\109\ These notifications and links provide a means by which
clients may access additional definitive proxy materials that
registrants may file in response to proxy voting advice.
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\109\ See supra note 57.
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b. Clients of Proxy Voting Advice Businesses as Well as Underlying
Investors
Clients that use PVABs for proxy voting advice will be affected by
the proposed amendments. In turn, investors and other groups on whose
behalf these clients make voting determinations will be affected. One
of the three major PVABs--ISS--is registered with the Commission as an
investment adviser and, as such, provides annually updated disclosure
with respect to its types of clients on Form ADV. Table 1 below reports
client types as disclosed by ISS.\110\
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\110\ See ISS Form ADV filing (describing clients classified as
``Other'' as ``Academic, vendor, other companies not able to
identify as above'').
Table 1--Number of Clients by Client Type
[As of March 28, 2020]
------------------------------------------------------------------------
Number of
Type of client \a\ clients \b\
------------------------------------------------------------------------
Banking or thrift institutions............................. 195
Pooled investment vehicles................................. 300
Pension and profit sharing plans........................... 170
Charitable organizations................................... 110
State or municipal government entities..................... 10
Other investment advisers.................................. 960
Insurance companies........................................ 40
Sovereign wealth funds and foreign official institutions... 10
Corporations or other businesses not listed above.......... 70
Other...................................................... 225
------------
Total.................................................... 2,095
------------------------------------------------------------------------
\a\ The table excludes client types for which ISS indicated either zero
clients or fewer than five clients.
\b\ Form ADV filers indicate the approximate number of clients
attributable to each type of client. If the filer has fewer than five
clients in a particular category (other than investment companies,
business development companies, and pooled investment vehicles), it
may indicate that it has fewer than five clients rather than reporting
the number of clients.
Table 1 illustrates the types of clients that utilize the services
of one of the largest PVABs. For example, while investment advisers
(``Other investment advisers'' in Table 1) constitute a 46 percent
plurality of clients for ISS, other types of clients include pooled
investment vehicles (14 percent) and pension and profit sharing plans
(eight percent). Other users of the services offered by ISS include
corporations, charitable organizations and insurance companies.\111\
Certain of these users of PVABs' services make voting determinations
that affect the interests of a wide array of individual investors,
beneficiaries and other constituents.
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\111\ Id.
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c. Registrants
Registrants also will be affected by the proposed amendments.
Registrants that have a class of equity securities registered under
Section 12 of the Exchange Act as well as non-registrant parties that
conduct proxy solicitations with respect to those registrants are
subject to the Federal proxy rules.\112\ In addition, there are certain
other companies that do not have a class of equity securities
registered under Section 12 of the Exchange Act that file proxy
materials with the Commission. Finally, Rule 20a-1 under the Investment
Company Act subjects all registered management investment companies to
the Federal proxy rules.\113\
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\112\ Foreign private registrants are exempt from the Federal
proxy rules under Rule 3a12-3(b) of the Exchange Act. See 17 CFR
240.3a12-3. Furthermore, we are not aware of any asset-backed
registrants that have a class of equity securities registered under
Section 12 of the Exchange Act. Most asset-backed registrants are
registered under Section 15(d) of the Exchange Act and thus are not
subject to the Federal proxy rules. Nine asset-backed registrants
obtained a class of debt securities registered under Section 12 of
the Exchange Act as of December 2018. As a result, these asset-
backed registrants are not subject to the Federal proxy rules.
\113\ Under Rule 20a-1 of the Investment Company Act, registered
management investment companies must comply with regulations adopted
pursuant to Section 14(a) of the Exchange Act that would be
applicable to a proxy solicitation if it were made with respect to a
security registered pursuant to Section 12 of the Exchange Act. See
17 CFR 270.20a-1. Additionally, ``registered management investment
company'' means any investment company other than a face-amount
certificate company or a unit investment trust. See 15 U.S.C. 80a-4.
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We note that because registrants are owned by investors, effects on
registrants as a result of the proposed amendments will accrue to
investors. Among the investors in a given registrant, there may be
individual investors or groups of investors that may want to influence
the direction that the registrant should pursue. Those individual
investors or groups of investors could be clients of PVABs. Separately,
because of the principal-agent relationship between investors
[[Page 67393]]
and management in a corporation, there may exist conflicts between
management of the registrant and investors. It is possible that some
investors may use PVABs' advice as part of their decision-making
process on a particular matter presented for shareholder approval for
which management's interests may not be aligned with those of investors
in general.
As of December 31, 2020, we estimate that approximately 5,400
registrants had a class of securities registered under Section 12 of
the Exchange Act.\114\ As of the same date, there were approximately 86
companies that did not have a class of securities registered under
Section 12 of the Exchange Act that filed proxy materials.\115\ As of
September 30, 2021, there were 14,062 registered management investment
companies that were subject to the proxy rules: (i) 13,347 open-end
funds, out of which 2,497 were Exchange Traded Funds (``ETFs'')
registered as open-end funds or open-end funds that had an ETF share
class; (ii) 701 closed-end funds; and (iii) 14 variable annuity
separate accounts registered as management investment companies.\116\
As of June 2021, we identified 99 Business Development Companies
(``BDCs'') that could be subject to the proposed amendments.\117\ The
summation of these estimates yields 19,647 companies that may be
affected by the proposed amendments.\118\
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\114\ We are able to estimate the number of registrants with a
class of securities registered under Section 12 of the Exchange Act
by reviewing all Forms 10-K and 10-K amendments filed during
calendar year 2018 with the Commission. After reviewing all forms,
we then count the number of unique registrants that identify
themselves as having a class of securities registered under Section
12(b) or Section 12(g) of the Exchange Act. Foreign private
registrants that filed both Forms 20-F and 40-F, as well as asset-
backed registrants that filed Forms 10-D and 10-D/A during calendar
year 2018 with the Commission are excluded from this estimate. This
estimate excludes BDCs that filed Form 10-K or an amendment in 2020.
\115\ We identify these issuers as those that: (1) Are subject
to the reporting obligations of Exchange Act Section 15(d), but do
not have a class of equity securities registered under Exchange Act
Section 12(b) or 12(g); and (2) have filed any proxy materials
during calendar year 2020 with the Commission. Additionally, we are
considering the following proxy materials in our analysis: DEF14A;
DEF14C; DEFA14A; DEFC14A; DEFM14A; DEFM14C; DEFR14A; DEFR14C;
DFAN14A; N-14; PRE 14A; PRE 14C; PREC14A; PREM14A; PREM14C; PRER14A;
PRER14C. Form N-14 can be a registration statement and/or proxy
statement. We also manually review all Forms N-14 filed during
calendar year 2020 with the Commission, excluding any Forms N-14
that are exclusively registration statements from our estimates. To
identify registrants reporting pursuant to Section 15(d), but not
registered under Section 12(b) or Section 12(g), we review all Forms
10-K filed in calendar year 2020 with the Commission. We then count
the number of unique registrants that identify themselves as subject
to Section 15(d) reporting obligations with no class of equity
securities registered under Section 12(b) or Section 12(g).
\116\ We estimate the number of unique registered management
investment companies based on Forms N-CEN filed between December
2020 and September 2021 with the Commission. Open-end funds are
registered on Form N-1A, while closed-end funds are registered on
Form N-2. Variable annuity separate accounts registered as
management investment companies are trusts registered on Form N-3.
\117\ BDCs are entities that have been issued an 814-reporting
number. Our estimate includes 82 BDCs that filed Form 10-K in 2020,
as well as 17 BDCs that were not traded.
\118\ The 19,647 potentially affected registrants is the sum of:
(a) 5,400 registrants with a class of securities registered under
Section 12 of the Exchange Act; (b) 86 registrants without a class
of securities registered under Section 12 of the Exchange Act that
filed proxy materials; (c) 14,062 registered management investment
companies; and (d) 99 BDCs.
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The above estimates are an upper bound of the number of potentially
affected companies because not all of these registrants may file proxy
materials related to a meeting for which a PVAB issues proxy voting
advice in a given year. Out of the 19,647 potentially affected
registrants mentioned above, approximately 5,350 filed proxy materials
with the Commission during calendar year 2020.\119\ Out of the 5,350
registrants, 4,500 (84 percent) were Section 12 or Section 15(d)
registrants and the remaining 850 (16 percent) were registered
management investment companies.
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\119\ See 2020 Adopting Release at n.544 (setting forth details
on the estimation of companies that filed proxy materials with the
Commission during calendar year 2018).
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2. Current Regulatory Framework
On July 22, 2020, the Commission adopted the 2020 Final Rules. The
2020 Final Rules:
<bullet> Amended Rule 14a-1(l) to codify the Commission's
interpretation that proxy voting advice generally constitutes a
``solicitation'' subject to the proxy rules.
<bullet> Adopted Rule 14a-2(b)(9) to add new conditions to two
exemptions (set forth in Rules 14a-2(b)(1) and (3)) that PVABs
generally rely on to avoid the proxy rules' information and filing
requirements. Those conditions include:
[cir] New conflicts of interest disclosure requirements; and
[cir] The Rule 14a-2(b)(9)(ii) conditions.
<bullet> Amended the Note to Rule 14a-9, which prohibits false or
misleading statements, to include specific examples of material
misstatements or omissions related to proxy voting advice.
Specifically, Note (e) provides that the failure to disclose material
information regarding proxy voting advice, ``such as the [PVAB's]
methodology, sources of information, or conflicts of interest'' could,
depending upon particular facts and circumstances, be misleading within
the meaning of the rule.
The changes to the definition of ``solicitation'' and to Rule 14a-9
became effective on November 2, 2020. The conditions set forth in Rule
14a-2(b)(9) will become effective on December 1, 2021.
B. Benefits and Costs
In the following sections, we discuss the specific benefits and
costs of the proposed amendments.
1. Benefits
The main benefit for PVABs from our proposed rescission of the Rule
14a-2(b)(9)(ii) conditions would be the reduction of the initial or
ongoing \120\ direct costs associated with modifying their current
systems and methods, or developing and maintaining new systems and
methods, to satisfy the requirement of Rule 14a-2(b)(9)(ii)(A) that
PVABs adopt and publicly disclose written policies and procedures
reasonably designed to ensure that registrants that are the subject of
proxy voting advice have such advice made available to them at or prior
to the time such advice is disseminated to PVABs' clients.
Additionally, the proposed amendments would reduce the direct costs of
satisfying the requirement of Rule 14a-2(b)(9)(ii)(B) that PVABs adopt
and publicly disclose written policies and procedures reasonably
designed to ensure that PVABs provide clients with a mechanism by which
they can reasonably be expected to become aware of a registrant's
written statements about the proxy voting advice in a timely manner
before the shareholder meeting.
[[Page 67394]]
As set forth in the 2020 Final Rules, to be eligible for the safe
harbor in Rule 14a-2(b)(9)(iv), a PVAB could provide: (i) Notice on its
electronic client platform that the registrant has filed, or has
informed the PVAB that it intends to file, additional soliciting
materials (and include an active hyperlink to those materials on EDGAR
when available); or (ii) notice through email or other electronic means
that the registrant has filed, or has informed the PVAB that it intends
to file, additional soliciting materials (and include an active
hyperlink to those materials on EDGAR when available). Both mechanisms
for informing clients could involve initial set-up costs as well as
ongoing costs.
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\120\ The compliance date for the Rule 14a-2(b)(9)(ii)
conditions is December 1, 2021. On June 1, 2021, the Division of
Corporation Finance issued a statement that it would not recommend
enforcement action based on the Interpretive Release or the 2020
Final Rules during the period in which the Commission is considering
further regulatory action in this area. Division of Corporation
Finance, Statement on Compliance with the Commission's 2019
Interpretation and Guidance Regarding the Applicability of the Proxy
Rules to Proxy Voting Advice and Amended Rules 14a-1(1), 14a-2(b),
14a-9, U.S. Securities and Exchange Commission, available at <a href="https://www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01">https://www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01</a>.
This staff statement does not alter the December 1, 2021 compliance
date for the Rule 14a-2(b)(9)(ii) conditions, and thus we recognize
that PVABs may have already incurred certain costs to modify their
systems or otherwise ensure that the conditions of the exemption are
met. Even so, the elimination of these conditions would eliminate
any ongoing costs or other costs of the conditions that have not yet
been incurred. To the extent a PVAB has not yet incurred any direct
costs from the Rule 14a-2(b)(9)(ii) conditions, the proposed
amendments would eliminate or avoid potential future costs.
---------------------------------------------------------------------------
To the extent PVABs already have similar systems in place to meet
the requirements of Rules 14a-2(b)(9)(ii)(A) and (B), any benefits from
the proposed amendments may be limited.\121\ For purposes of the
Paperwork Reduction Act of 1995 (``PRA''),\122\ in the adopting release
for the 2020 Final Rules, we estimated that each PVAB would incur 2,845
burden hours to satisfy Rule 14a-2(b)(9)(ii)(A) and 2,845 burden hours
to satisfy Rule 14a-2(b)(9)(ii)(B).\123\ Also for purposes of our PRA
analysis, we estimated that each PVAB would incur a burden of between
50 and 5,690 hours per year associated with securing an acknowledgment
or other assurance that the proxy voting advice will not be
disclosed.\124\ We believe that the proposed amendments would eliminate
these PRA burdens.
---------------------------------------------------------------------------
\121\ See supra Section II.A.1.
\122\ 44 U.S.C. 3501 et seq.
\123\ See 2020 Adopting Release at Section V.B.1.
\124\ See 2020 Adopting Release at Section V.B.1.
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Additionally, while all three major PVABs currently offer
registrants access to their proxy voting advice, in some circumstances
they may charge a fee to registrants for such access.\125\ Once the
Rule 14a-2(b)(9)(ii) conditions become effective, the requirement to
share full reports with registrants under Rule 14a-2(b)(9)(ii) may
result in a PVAB providing access to proxy voting reports at no charge
to registrants to the extent that the PVAB relies on the safe harbor
provided in Rule 14a-2(b)(9)(iii) to satisfy the condition in Rule 14a-
2(b)(9)(ii)(A).\126\ This would cause such a PVAB to lose fees it
otherwise would have earned from selling proxy voting advice to
registrants. By eliminating the Rule 14a-2(b)(9)(ii) conditions (and,
therefore, the need to rely on the Rule 14a-2(b)(9)(iii) safe harbor),
the proposed amendments could allow PVABs to charge registrants for
access to the proxy voting reports, thus increasing their revenues.
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\125\ See 2020 Adopting Release at Section IV.B.1.a.ii.
\126\ To rely on the safe harbor in Rule 14a-2(b)(9)(iii), a
PVAB must provide registrants with a copy of the proxy voting advice
at no charge.
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The proposed amendments may also benefit other parties. PVABs may
pass through a portion of the costs of modifying, developing or
maintaining systems to meet the Rule 14a-2(b)(9)(ii) conditions to
their clients through higher fees for proxy voting advice. Eliminating
such costs could therefore be beneficial to clients of PVABs.
Some commenters on the 2019 Proposed Rules suggested that the
proposal could negatively affect PVABs' independence: Because of the
ability of registrants to review and provide feedback on proxy voting
advice in advance of its dissemination to PVABs' clients (and
potentially lobby PVABs for changes to recommendations), the 2019
Proposed Rules could have diminished PVABs' willingness to recommend
votes against management, thus substantially diminishing the
independent information available to investors and impeding investors'
ability to monitor company management.\127\ The 2020 Final Rules did
not include a registrant advance review and feedback process, and
instead implemented a principles-based approach, in an effort to
address such concerns. However, notwithstanding these changes, clients
of PVABs have continued to express strong concerns about the adverse
effects of the amendments on the independence of proxy voting advice.
To the extent that the proposed amendments eliminate the possibility of
such alleged adverse effects, they would benefit PVABs, their clients
and investors in general.
---------------------------------------------------------------------------
\127\ See comment letters from Fiona Reynolds, Chief Executive
Officer, Principles for Responsible Investment (Feb. 3, 2020) and
ISS.
---------------------------------------------------------------------------
Lastly, we do not expect the proposed deletion of paragraph (e) to
the Note to Rule 14a-9 to generate any significant benefits other than
avoiding any misperception that the 2020 Final Rules' addition of that
paragraph purported to determine or alter the law governing Rule 14a-
9's application and scope, including its application to statements of
opinion. Notwithstanding this proposed deletion, a PVAB may still be
subject to liability under Rule 14a-9, depending on the facts and
circumstances, for a materially misleading statement or omission of
fact, including with regard to its methodology, sources of information
or conflicts of interest. Thus, we expect that this proposed amendment
would not have any significant economic effect.
2. Costs
The proposed amendments may impose costs on the clients of PVABs--
and thereby ultimately the investors they serve--by potentially
reducing the overall mix of information available to those clients as
they assess proxy voting advice and make determinations about how to
cast votes. Requiring timely notice to registrants of proxy voting
advice could allow registrants to more effectively determine whether
they wish to respond to the recommendation by publishing additional
soliciting materials and to do so in a timely manner before
shareholders cast their votes. Registrants may wish to do so for a
variety of reasons, including, for example, because they have
identified what they perceive to be factual errors or methodological
weaknesses in a PVAB's analysis or because they have a different or
additional perspective with respect to the advice. In either case,
clients of PVABs, and registrants' investors in general, may benefit
from the availability of additional information upon which to base
their voting decisions. Clients of PVABs often must make voting
decisions in a compressed time period. Timely access to registrant
responses to proxy voting advice could facilitate a client's evaluation
of the advice by highlighting disagreements regarding facts and data,
differences of opinion or additional perspectives before the client
casts its votes. To the extent that the proposed amendments reduce this
type of information and it is valuable to investors, the proposed
amendments may make it more costly for investors to obtain such
information and to make timely voting decisions. Additionally, to the
extent that a PVAB relies on the safe harbor Rule 14a-2(b)(9)(iii),
which requires PVABs to provide registrants with their proxy voting
advice for free, the proposed amendments may cause some registrants to
incur costs in the form of fees or the purchase of additional PVAB
services in order to obtain and respond to proxy voting advice. Such
costs will ultimately be borne by investors.
We note, however, that some PVABs currently have internal policies
and procedures aimed at enabling feedback from certain registrants
before they issue voting advice.\128\ Additionally, the above-described
efforts by PVABs to develop industry-wide standards, such
[[Page 67395]]
as the BPPG's principles and the Oversight Committee's role in
assessing compliance with such standards, could address some of the
concerns underlying the Rule 14a-2(b)(9)(ii) conditions. Thus, if PVABs
already provide accurate and complete proxy voting advice to their
clients, this potential cost associated with the proposed amendments
may not be significant. Moreover, because PVABs developed these
internal policies and measures themselves, we believe they are less
likely to adversely affect the independence, cost and timeliness of
proxy voting advice than measures they would adopt to satisfy the Rule
14a-2(b)(9)(ii) conditions.
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\128\ See, e.g., comment letters from Kevin Cameron, Executive
Chair, Glass Lewis (Feb. 3, 2020) and ISS.
---------------------------------------------------------------------------
Lastly, we do not expect the proposed deletion of Note (e) to Rule
14a-9 to create any significant costs for PVABs. Given that this
proposed amendment would not alter a PVAB's liability under Rule 14a-9,
we would expect that its economic impact would be minimal.
C. Effects on Efficiency, Competition, and Capital Formation
As discussed in Section III.A above, PVABs perform a variety of
functions for their clients, including analyzing and making voting
recommendations on matters presented for shareholder votes and included
in registrants' proxy statements. As an alternative to utilizing these
services, clients of PVABs could instead conduct their own analyses and
execute votes using internal resources.\129\ Given the costs of
analyzing and voting proxies, the services offered by PVABs may offer
economies of scale relative to their clients performing those functions
themselves. For example, a GAO study found that among 31 institutions,
including mutual funds, pension funds and asset managers, large
institutions rely less than small institutions on the research and
recommendations offered by PVABs.\130\ Small institutional investors
surveyed in the study indicated they had limited resources to conduct
their own research.\131\
---------------------------------------------------------------------------
\129\ Clients of PVABs may also rely on some combination of
internal and external analysis.
\130\ See U.S. Gov't Accountability Office, GAO-07-765, Report
to Congressional Requesters, Corporate Shareholder Meetings: Issues
Relating to the Firms that Advise Institutional Investors on Proxy
Voting, 2 (2007), available at <a href="https://www.gao.gov/new.items/d07765.pdf">https://www.gao.gov/new.items/d07765.pdf</a> (``2007 GAO Report''). See generally comment letter from
Business Roundtable (Feb. 3, 2020) (stating that because many
institutional investors face voting on a large number of corporate
matters every year but lack personnel and resources for managing
such activities, they outsource tasks to proxy advisors). See also
letters in response to the SEC Staff Roundtable on the Proxy Process
from BlackRock (Nov. 16, 2018) (stating that ``BlackRock's
Investment Stewardship team has more than 40 professionals
responsible for developing independent views on how we should vote
proxies on behalf of our clients''); NYC Comptroller (Jan. 2, 2019)
(stating that we ``have five full-time staff dedicated to proxy
voting during peak season, and our least-tenured investment analyst
has 12 years' experience applying the NYC Funds' domestic proxy
voting guidelines'').
\131\ See 2007 GAO Report at 2. See also letters in response to
the SEC Staff Roundtable on the Proxy Process from Ohio Public
Retirement (Dec. 13, 2018) (``OPERS also depends heavily on the
research reports we receive from our proxy advisory firm. These
reports are critical to the internal analyses we perform before any
vote is submitted. Without access to the timely and independent
research provided by our proxy advisory firm, it would be virtually
impossible to meet our obligations to our members.''); Transcript of
Roundtable on the Proxy Process at 194 (comments of Mr. Scot
Draeger, stating that: ``If you've ever actually reviewed the
benchmarks, whether it's ISS or anybody else, they're very extensive
and much more detailed than small firm[s] like ours could ever
develop with our own independent research.'').
---------------------------------------------------------------------------
To the extent the 2020 Final Rules increase compliance costs and
litigation-risk costs for PVABs which could be passed on to clients,
the proposed amendments could reverse those increases along with any
decrease in demand for PVABs' advice they may have caused. To the
extent PVABs offer economies of scale relative to their clients
performing certain functions themselves, increased demand for, and
reliance upon, PVABs' services could lead to greater efficiencies in
the proxy voting process.
To the extent that the Rule 14a-2(b)(9)(ii) conditions impair the
independence of PVABs or reduce the diversity of thought in the market
for proxy voting advice (e.g., by PVABs erring on the side of caution
in complex or contentious matters), the proposed elimination of those
conditions could reverse those effects, thus leading to advice from
PVABs that is more accurate, useful and valuable to their clients. If
clients perceive the proposed amendments as positively affecting PVABs'
objectivity and independence, this could lead to an increase in demand
for proxy voting advice and potentially greater efficiencies in the
proxy voting process.\132\
---------------------------------------------------------------------------
\132\ As noted above, we do not have financial data about PVABs,
including financial data by services provided or by client type.
This makes these assessments on a quantitative basis difficult.
---------------------------------------------------------------------------
If the proposed amendments reduce costs for PVABs, this could
increase competition for proxy voting advice compared to the current
baseline, which includes the effect of the 2020 Final Rules. In
particular, if costs associated with the 2020 Final Rules are passed on
to clients, the reduction of these costs because of the proposed
amendments could encourage some investors to retain the services of
PVABs, which could reduce the use of internal resources for voting.
Also, if the proposed amendments improve the independence of PVABs and
thus increase the quality of proxy voting advice, this could cause
PVABs to compete more on this dimension. Lastly, reduction in
compliance costs and litigation-risk costs, if large enough, may
encourage entry into the market for proxy voting advice, increasing the
competition among PVABs.\133\ However, given the fact that prior to the
adoption of the 2020 Final Rules there were only three major PVABs in
the United States, we do not expect that the proposed amendments would
significantly increase the likelihood of new entry into this market.
---------------------------------------------------------------------------
\133\ See comment letter from Sarah Wilson, CEO, Minerva
Analytics (Feb. 22, 2020). In its comment letter, Minerva, a PVAB in
the U.S. market prior to 2010, stated that the threat of litigation
for ``errors'' is a factor influencing its views on whether to
reenter the U.S. market. Id.
---------------------------------------------------------------------------
If the proposed amendments facilitate the ability of clients of
PVABs to make informed voting determinations, this could ultimately
lead to improved investment outcomes for investors. This, in turn,
could lead to a greater allocation of resources to investment. To the
extent that the proposed amendments lead to more investment, we could
expect greater demand for securities, which could, in turn, promote
capital formation. Overall, given the many factors that can influence
the rate of capital formation, any effect of the proposed amendments on
capital formation is expected to be small.
Lastly, we do not expect the proposed deletion of Note (e) to Rule
14a-9 to have any significant economic effect on efficiency,
competition and capital formation.
D. Reasonable Alternatives
1. Interpretive Guidance or No-Action Relief on Whether Systems and
Processes Satisfy the 2020 Final Rules
Alternatives to rescinding the Rule 14a-2(b)(9)(ii) conditions that
could reduce compliance costs and independence concerns for PVABs
include the Commission issuing interpretive guidance or the staff
providing no-action relief regarding whether the systems and processes
that PVABs have in place satisfy the 2020 Final Rules. The benefit of
either of these approaches is that they could reduce PVABs' initial or
ongoing costs of complying with the 2020 Final Rules if the Commission
were to determine that their current systems and processes already
satisfy the conditions in Rule 14a-2(b)(9), at least to the extent
PVABs
[[Page 67396]]
have not already made modifications to their existing business models.
To the extent PVABs' existing systems and processes satisfy the Rule
14a-2(b)(9)(ii) conditions, these approaches could also mitigate
concerns that the independence of the advice could become impaired by
making clear that modifications are not required. The potential cost of
these alternatives is that, to the extent that PVABs' current systems
and processes do not satisfy the 2020 Final Rules, they may not
eliminate potential costs or concerns associated with the requirements
of Rule 14a-2(b)(9).
2. Exempting Certain Parts of PVABs' Proxy Voting Advice From Rule 14a-
9 Liability
Rather than, or in addition to, deleting Note (e) to Rule 14a-9,
the Commission could amend Rule 14a-9 to exempt certain portions of
proxy voting advice from Rule 14a-9 liability. For example, the
Commission could amend Rule 14a-9 to expressly state that a PVAB would
not be subject to liability under that rule for any subjective
determinations it makes in formulating its recommendations, including
its decision to use a specific analysis, methodology or information.
The benefit of this alternative would be that it may give PVABs
additional comfort that they will not be subject to liability under
Rule 14a-9 on the basis of mere disagreement over their analysis,
methodology or sources of information. The main cost of this
alternative is that it may lower the overall quality of the advice that
PVABs provide, and thus negatively affect the voting decisions of
institutional investors and investment advisers, and ultimately the
other investors they serve. In addition, creating such an exemption
from Rule 14a-9 liability that differs from existing law may generate
additional uncertainty and litigation.
Request for Comment
11. Have we correctly characterized the benefits and costs for
PVABs from the proposed amendments? Are there any other benefits and
costs that should be considered? Please provide supportive data to the
extent available.
12. Have we correctly characterized the benefits and costs for
institutional investors, their clients and registrants from the
proposed amendments? Are there any other related benefits and costs
that should be considered? Please provide supportive data to the extent
available.
13. We assume that the proposed amendments would strengthen the
independence of PVABs. Are we correct in that characterization? Please
provide supportive data to the extent available.
14. Have we correctly characterized the effects on efficiency,
competition and capital formation from the proposed amendments? Are
there any effects that should be considered? Please provide supportive
data to the extent available.
IV. Paperwork Reduction Act
A. Summary of the Collections of Information
Certain provisions of our rules, schedules and forms that would be
affected by the proposed amendments contain ``collection of
information'' requirements within the meaning of the PRA. We are
submitting the proposed amendments to the Office of Management and
Budget (``OMB'') for review in accordance with the PRA.\134\ The hours
and costs associated with maintaining, disclosing or providing the
information required by the proposed amendments constitute paperwork
burdens imposed by such collection of information. An agency may not
conduct or sponsor, and a person is not required to comply with, a
collection of information unless it displays a currently valid OMB
control number. The title for the affected collection of information
is: ``Regulation 14A (Commission Rules 14a-1 through 14a-21 and
Schedule 14A)'' (OMB Control No. 3235-0059).
---------------------------------------------------------------------------
\134\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------
We adopted existing Regulation 14A \135\ pursuant to the Exchange
Act. Regulation 14A and its related schedules set forth the disclosure
and other requirements for proxy statements, as well as the exemptions
therefrom, filed by registrants and other soliciting persons to help
investors make informed voting decisions.\136\ A detailed description
of the proposed amendments, including the need for the information and
its proposed use, as well as a description of the likely respondents,
can be found in Section II above, and a discussion of the expected
economic effects of the proposed amendments can be found in Section III
above.
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\135\ 17 CFR 240.14a-1 et seq.
\136\ To the extent that a person or entity incurs a burden
imposed by Regulation 14A, it is encompassed within the collection
of information estimates for Regulation 14A. This includes
registrants and other soliciting persons preparing, filing,
processing and circulating their definitive proxy and information
statements and additional soliciting materials, as well as the
efforts of third parties such as PVABs whose proxy voting advice
falls within the ambit of the Federal rules and regulations that
govern proxy solicitations.
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B. Incremental and Aggregate Burden and Cost Estimates for the Proposed
Amendments
Below we estimate the incremental and aggregate effect on paperwork
burden as a result of the proposed amendments. Most, if not all, of the
effect on paperwork burden as a result of the proposed amendments would
come from the rescission of Rule 14a-2(b)(9)(ii) and would be expected
to reduce the burden from Rule 14a-2(b)(9). However, because Rule 14a-
2(b)(9) has not yet become effective, that rule has not yet resulted in
any paperwork burden, and there is nothing yet to reduce. Our proposed
amendments to Rule 14a-2(b)(9), therefore, would not have any effect on
the current paperwork burden as of the date of this release.
Nonetheless, as Rule 14a-2(b)(9) is scheduled to become effective on
December 1, 2021, to fully analyze the impact of the proposed
amendments, for purposes of this PRA analysis, we instead set forth the
estimated amount of paperwork burden that the parties affected by Rule
14a-2(b)(9) would avoid as a result of our proposed amendments to Rule
14a-2(b)(9), including our proposed rescission of the Rule 14a-
2(b)(9)(ii) conditions.
1. Impact on Affected Parties
As discussed above in Section III.A.1, there are a variety of
parties that may be affected, directly or indirectly, by the proposed
amendments. These include PVABs; the clients to whom PVABs provide
proxy voting advice; investors and other groups on whose behalf the
clients of PVABs make voting determinations; registrants who are
conducting solicitations and are the subject of proxy voting advice;
and the registrants' shareholders, who ultimately bear the costs and
benefits to the registrant associated with the outcome of voting
matters covered by proxy voting advice.
Of these parties, we expect that PVABs would avoid some additional
paperwork burden as a result of the proposed amendments.\137\ As
discussed
[[Page 67397]]
further below, we believe that any avoidance of an incremental increase
in burdens would be attributable primarily to the rescission of Rule
14a-2(b)(9)(ii). With respect to the proposed amendment to Rule 14a-9,
we do not expect the economic impact of this amendment will be
significant because it would not change existing law and, therefore,
would not change respondents' legal obligations.\138\ Moreover, any
impact arising from this proposed amendment is not expected to
materially change the average PRA burden hour estimates associated with
Regulation 14A. Thus, we have not made any adjustments to our PRA
burden estimates in respect of the proposed amendment to Rule 14a-9.
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\137\ The PRA requires that we estimate ``the total annual
reporting and recordkeeping burden that will result from the
collection of information.'' [5 CFR 1320.5(a)(1)(iv)(B)(5)] A
``collection of information'' includes any requirement or request
for persons to obtain, maintain, retain, report or publicly disclose
information [5 CFR 1320.3(c)]. OMB's current inventory for
Regulation 14A, therefore, is an assessment of the paperwork burden
associated with such requirements and requests under the regulation,
and this PRA is an assessment of changes to such inventory expected
to result from these proposed amendments. While other parties, such
as the clients of PVABs, may have benefits and costs associated with
the proposed amendments (see supra Section III.B.), only PVABs and
registrants will avoid any additional paperwork burden as a result
of the proposed amendments.
\138\ The proposed amendment to Rule 14a-9 may relieve PVABs of
direct costs to the extent Note (e) to that rule prompted some PVABs
to provide additional disclosure about the bases for their proxy
voting advice. However, we expect any such costs would be minimal
because the adoption of that Note did not represent a change to
existing law, nor did it broaden the concept of materiality or
create a new cause of action. See 2020 Adopting Release at n.685.
Similarly, we expect that any avoidance of incremental burdens
associated with our proposed amendment to Rule 14a-9 would be
minimal because our proposed rescission of Note (e) to Rule 14a-9 is
not intended to alter that rule's application to proxy voting
advice. See supra Section II.B.2.
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a. Proxy Voting Advice Businesses
We expect that PVABs would avoid increased paperwork burden as a
result of our proposed amendments to Rule 14a-2(b)(9), which, when
effective,\139\ will apply to anyone relying on the exemptions in Rules
14a-2(b)(1) or (b)(3) who furnishes proxy voting advice covered by Rule
14a-1(l)(1)(iii)(A). The amount of burdens that PVABs would avoid
depends on a number of factors that are firm-specific and highly
variable, which makes it difficult to provide reliable quantitative
estimates.\140\
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\139\ See supra note 3 and accompanying text.
\140\ See generally the discussion in Section III.B.1 supra
concerning the difficulty in providing quantitative estimates of the
benefits to PVABs associated with the proposed amendments.
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There are two components of the proposed amendments to Rule 14a-
2(b)(9) that we expect to result in an avoidance of increased burdens.
First, under Rule 14a-2(b)(9)(ii)(A), PVABs are required to adopt and
publicly disclose written policies and procedures reasonably designed
to ensure that registrants that are the subject of the proxy voting
advice have such advice made available to them at or prior to the time
such advice is disseminated to the PVABs' clients. Second, under Rule
14a-2(b)(9)(ii)(B), PVABs are required to adopt and publicly disclose
written policies and procedures reasonably designed to ensure that
PVABs provide their clients with a mechanism by which they can
reasonably be expected to become aware of a registrant's written
statements about the proxy voting advice in a timely manner before the
shareholder meeting. The proposed amendments would rescind both of
these rules, thereby relieving PVABs of the obligation to comply with
these requirements. The proposed amendments would also rescind the non-
exclusive safe harbors (set forth in Rules 14a-2(b)(9)(iii) and (iv))
that PVABs may use to satisfy the principle-based requirements in Rule
14a-2(b)(9)(ii). We address each of these components in turn.
In the release adopting the 2020 Final Rules, we estimated that
PVABs would incur an annual incremental paperwork burden to comply with
Rules 14a-2(b)(9)(ii), (iii) and (iv) as follows:
------------------------------------------------------------------------
PVAB estimated incremental
New requirement annual compliance burden
------------------------------------------------------------------------
Rule 14a-2(b)(9)(ii)(A)--Notice to Increase in paperwork burden
Registrants and Rule 14a 2(b)(9)(iii) corresponding to:
Safe Harbor.
------------------------------------------------------------------------
The PVAB has adopted and publicly To the extent that the PVAB's
disclosed written policies and current practices and
procedures reasonably designed to procedures are not already
ensure that registrants who are the sufficient:
subject of proxy voting advice have [cir] Developing new or
such advice made available to them at modifying existing systems,
or prior to the time the advice is policies and methods, or
disseminated to clients of the PVAB. developing and maintaining new
Safe Harbor--The PVAB has written systems, policies and methods
policies and procedures that are to ensure that it has the
reasonably designed to provide a capability to timely provide
registrant with a copy of the PVAB's each registrant with
proxy voting advice, at no charge, no information about its proxy
later than the time it is disseminated voting advice necessary to
to the PVAB's clients. Such policies satisfy the requirement in
and procedures may include conditions Rule 14a-2(b)(9)(ii)(A) and/or
requiring that:. the safe harbor in Rule 14a-
(A) The registrant has filed its 2(b)(9)(iii).
definitive proxy statement at least 40 [cir] If applicable, obtaining
calendar days before the security acknowledgments or agreements
holder meeting date (or if no meeting with respect to use of any
is held, at least 40 calendar days information shared with the
before the date the votes, consents, registrant; and
or authorizations may be used to [cir] Delivering copies of
effect the proposed action); and. proxy voting advice to
registrants
We estimate the increase in
paperwork burden to be 8,535
hours per PVAB, consisting of
2,845 hours for system updates
and 5,690 hours for
acknowledgments regarding
sharing information.
(B) The registrant has
acknowledged that it will only
use the copy of the proxy
voting advice for its internal
purposes and/or in connection
with the solicitation and it
will not be published or
otherwise shared except with
the registrant's employees or
advisers.
------------------------------------------------------------------------
Rule 14a-2(b)(9)(ii)(B)--Notice to Increase in paperwork burden
Clients of Proxy Voting Advice corresponding to:
Businesses and Rule 14a-2(b)(9)(iv)
Safe Harbor.
------------------------------------------------------------------------
[[Page 67398]]
The PVAB has adopted and publicly To the extent that the PVAB's
disclosed written policies and current practices and
procedures reasonably designed to procedures are not already
ensure that the PVAB provides clients sufficient:
with a mechanism by which they can Developing new or modifying
reasonably be expected to become aware existing systems, policies and
of any written statements regarding methods, or developing and
proxy voting advice by registrants who maintaining new systems,
are the subject of such advice, in a policies and methods capable
timely manner before the shareholder of:
meeting. [cir] Tracking whether the
Safe harbor--The PVAB has written registrant has filed
policies and procedures that are additional soliciting
reasonably designed to inform clients materials;
who receive the proxy voting advice [cir] Ensuring that PVABs
when a registrant that is the subject provide clients with a means
of such voting advice notifies the to learn of a registrant's
proxy voting advice business that it written statements about proxy
intends to file or has filed voting advice in a timely
additional soliciting materials with manner that satisfies the
the Commission setting forth the requirement in Rule 14a-
registrant's statement regarding the 2(b)(9)(ii)(B) and/or the safe
voting advice, by:. harbor in Rule 14a-
(A) Providing notice to its clients on 2(b)(9)(iv).
its electronic client platform that If relying on the safe harbor
the registrant intends to file or has in Rule 14a-2(b)(9)(iv)(A) or
filed such additional soliciting (B), the associated paperwork
materials and including an active burden would include the time
hyperlink to those materials on EDGAR and effort required of the
when available; or. PVAB to:
(B) The PVAB providing notice to its [cir] Provide notice to its
clients through email or other clients through the PVAB's
electronic means that the registrant electronic client platform or
intends to file or has filed such email or other electronic
additional soliciting materials and medium, as appropriate, that
including an active hyperlink to those the registrant intends to file
materials on EDGAR when available.. or has filed additional
soliciting materials setting
forth its views about the
proxy voting advice; and
[cir] include a hyperlink to
the registrant's statement on
EDGAR.
We estimate the increase in
paperwork burden to be 2,845
hours per PVAB.
--------------------------------
Total.............................. 11,380 hours per PVAB.
------------------------------------------------------------------------
Altogether, we estimated an annual total increase of 34,140 hours
\141\ in compliance burden to be incurred by PVABs that would be
subject to Rules 14a-2(b)(9)(ii), (iii) and (iv). Accordingly, we
expect that our proposed amendments would allow PVABs to avoid these
burdens that they would otherwise be subject to, absent the proposed
amendments, once Rule 14a-2(b)(9) becomes effective.
---------------------------------------------------------------------------
\141\ This represented the annual total burden increase expected
to be incurred by PVABs (as an average of the yearly burden
predicted over the three-year period following adoption of the 2020
Final Rules) and was intended to be inclusive of all burdens
reasonably anticipated to be associated with compliance with the
Rule 14a-2(b)(9)(ii) conditions. The Commission is aware of three
PVABs in the U.S. (i.e., Glass Lewis, ISS and Egan-Jones) whose
activities fall within the scope of proxy voting advice constituting
a solicitation under amended Rule 14a-1(l)(1)(iii)(A). We estimated
that each of these would have a burden of 11,380 hours per year
associated with Rules 14a-2(b)(9)(ii), (iii) and (iv). See 2020
Adopting Release at n.700. We recognized that there could be other
PVABs, including both smaller firms and firms operating outside the
U.S., which may also be subject to those rules. However, we expected
such a number to be small. Accordingly, rather than increasing our
estimate of the number of affected PVABs beyond the three discussed
above, we increased our annual total burden estimate by 500 hours to
account for those businesses. However, that 500 hour increase also
accounted for the burden imposed by Rule 14a-2(b)(9)(i), which is
not affected by the proposed amendments. Because we did not
indicate, in the adopting release for the 2020 Final Rules, what
portion of that 500 hour increase would be attributable to the
various conditions in Rule 14a-2(b)(9), we do not include that 500
hour increase in this PRA analysis in order to avoid overestimating
the amount of burden that PVABs would be relieved of as a result of
the proposed amendments.
---------------------------------------------------------------------------
b. Registrants
In addition to PVABs, we anticipate that registrants would avoid
increased paperwork burden as a result of our proposed amendment to
Rule 14a-2(b)(9). In the adopting release for the 2020 Final Rules, we
noted that registrants could, as a result of the adoption of Rule 14a-
2(b)(9), experience increased burdens associated with coordinating with
PVABs to receive the proxy voting advice, reviewing the proxy voting
advice and preparing and filing supplementary proxy materials in
response to the proxy voting advice, if they choose to do so. Because
Rule 14a-2(b)(9) does not require registrants to engage with PVABs or
take any action in response to proxy voting advice, we stated that we
expected a registrant would bear additional paperwork burden only if it
anticipated the benefits of engaging with the PVABs would exceed the
costs of participation. We noted that these costs would vary depending
upon the particular facts and circumstances of the proxy voting advice
and any issues identified therein, as well as the resources of the
registrant, which made it difficult to provide a reliable quantifiable
estimate of these costs.
Notwithstanding those difficulties, we estimated an average
increase of 50 hours per registrant in connection with the amendments
for a total annual increase of 284,500 hours, assuming that a
registrant's annual meeting of shareholders is covered by at least two
of the three major PVABs in the United States, and the registrant has
opted to review both sets of proxy voting advice and file additional
soliciting materials in response.\142\ Accordingly, we expect that by
eliminating the Rule 14a-2(b)(9)(ii) conditions, our proposed
amendments would result in a corresponding reduction of potential
paperwork burdens that those registrants would have otherwise been
expected to incur once Rule 14a-2(b)(9) becomes effective.
---------------------------------------------------------------------------
\142\ We also noted that such burden increase would be offset
against any corresponding reduction in burden resulting from the
registrant forgoing other methods of responding to the proxy voting
advice (such as investor outreach) that the registrant determines
are no longer necessary or are less preferable in light of Rule 14a-
2(b)(9).
---------------------------------------------------------------------------
2. Aggregate Burden Avoided as a Result of the Proposed Amendments
Table 1 summarizes the calculations and assumptions used in the
adopting release for the 2020 Final Rules to derive our estimates of
the aggregate increase in burden for all affected parties corresponding
to the Rule 14a-2(b)(9)(ii) conditions.
[[Page 67399]]
PRA Table 1--Calculation of Aggregate Increase in Burden Hours Resulting From the Rule 14a-2(b)(9)(ii)
Conditions
----------------------------------------------------------------------------------------------------------------
Affected parties
-----------------------------------------------------
Proxy voting advice
businesses Registrants
(A) (B)
----------------------------------------------------------------------------------------------------------------
Burden Hour Increase...................................... 34,140 284,500
-----------------------------------------------------
Aggregate Increase in Burden Hours........................ [Column Total (A)] + [Column Total (B)] = [318,640]
----------------------------------------------------------------------------------------------------------------
Accordingly, we expect that our proposed amendments would allow the
affected parties to avoid these estimated burden hours that they would
otherwise be subject to, absent the proposed amendments, once Rule 14a-
2(b)(9) becomes effective.
3. Increase in Annual Responses Avoided as a Result of the Proposed
Amendments
We believe that the proposed amendments would avoid an increase in
the number of annual responses \143\ to the existing collection of
information for Regulation 14A. In the adopting release for the 2020
Final Rules, we stated that we do not expect registrants to file any
different number of proxy statements as a result of those rules. We did
state, however, that we anticipated that the number of additional
soliciting materials filed under 17 CFR 240.14a-6 may increase in
proportion to the number of times that registrants choose to provide a
statement in response to a PVAB's proxy voting advice as contemplated
by Rule 14a-2(b)(9)(ii)(B) or the safe harbor under Rule 14a-
2(b)(9)(iv). For purposes of the PRA analysis in that release, we
estimated that there would be an additional 783 annual responses to the
collection of information as a result of the 2020 Final Rules.\144\
Accordingly, we expect that our proposed amendments would result in an
avoidance of such an increase in the number of additional annual
responses to the collection of information for Regulation 14A.
---------------------------------------------------------------------------
\143\ For purposes of the Regulation 14A collection of
information, the number of annual responses corresponds to the
estimated number of new filings that will be made each year under
Regulation 14A, which includes filings such as DEF 14A; DEFA14A;
DEFM14A; and DEFC14A. When calculating PRA burden for any particular
collection of information, the total number of annual burden hours
estimated is divided by the total number of annual responses
estimated, which provides the average estimated annual burden per
response. The current inventory of approved collections of
information is maintained by the Office of Information and
Regulatory Affairs (``OIRA''), a division of OMB. The total annual
burden hours and number of responses associated with Regulation 14A,
as updated from time to time, can be found at <a href="https://www.reginfo.gov/public/do/PRAMain">https://www.reginfo.gov/public/do/PRAMain</a>.
\144\ 2020 Adopting Release at n.707.
---------------------------------------------------------------------------
4. Incremental Change in Compliance Burden for Collection of
Information
PRA Table 2 below illustrates our estimated incremental change to
the total annual compliance burden for the Regulation 14A collection of
information in hours and in costs \145\ as a result of the Rule 14a-
2(b)(9)(ii) conditions, as calculated in the PRA analysis for the 2020
Final Rules. The table sets forth the percentage estimates we typically
use for the burden allocation for each response.
---------------------------------------------------------------------------
\145\ Our estimates in the adopting release for the 2020 Final
Rules assumed that 75% of the burden would be borne by the company
and 25% would be borne by outside counsel at $400 per hour. We
recognized that the costs of retaining outside professionals may
vary depending on the nature of the professional services, but for
purposes of the PRA analysis, we estimated that such costs would be
an average of $400 per hour. This estimate was based on
consultations with several registrants, law firms and other persons
who regularly assist registrants in preparing and filing reports
with the Commission. See 2020 Adopting Release at n.708.
PRA Table 2--Increase in Burden Hours Resulting From the Rule 14a-2(b)(9)(ii) Conditions as Reflected in the 2020 Final Rules
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of estimated Total increase in burden Increase in burden hours Increase in internal Increase in Increase in
responses hours per response hours professional hours professional costs
(A) [dagger] (B) [dagger][dagger] (C) = (B)/((D) = (B) x 0.75 (E) = (B) x 0.25 (F) = (E) x $400
--------------------------------------------------------------------------------------------------------------------------------------------------------
6,369 318,640 [dagger][dagger][dagger] 238,980 79,660 $31,864,000
50
--------------------------------------------------------------------------------------------------------------------------------------------------------
[dagger] This number reflects an estimated increase of 783 annual responses to the existing Regulation 14A collection of information as a result of the
Rule 14a-2(b)(9)(ii) conditions. See supra text accompanying note 144. The adopting release for the 2020 Final Rules indicated that 5,586 responses
are filed annually. 2020 Adopting Release at 55151.
[dagger][dagger] Calculated as the sum of annual burden increases estimated for PVABs (34,140 hours) and registrants (284,500 hours). See supra PRA
Table 1.
[dagger][dagger][dagger] The estimated increases in Columns (C), (D), and (E) are rounded to the nearest whole number.
Accordingly, we expect that our proposed amendments would allow the
affected parties to avoid these estimated burden hours and costs that
they would otherwise be subject to, absent the proposed amendments,
once Rule 14a-2(b)(9) becomes effective.
5. Program Change and Revised Burden Estimates
PRA Table 3 summarizes the estimated change to the total annual
compliance burden of the Regulation 14A collection of information, in
hours and in costs, as a result of the Rule 14a-2(b)(9)(ii) conditions,
as calculated in the PRA analysis for the 2020 Final Rules.
[[Page 67400]]
PRA Table 3--Paperwork Burden Under the Rule 14a-2(b)(9)(ii) Conditions as Reflected in the 2020 Final Rules--Reg. 14A
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current burden Program change Revised burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
Increase in
Current annual Current burden Current cost Increase in Increase in professional Annual Burden hours Cost burden
responses hours burden responses internal hours costs responses
(A) (B) (C) (D) <plus- (E) <plus- (F) <plus- (H) = (B) + (E) (I) = (C) + (F)
minus> minus><plus- minus><plus-
minus> minus><plus-
minus>
--------------------------------------------------------------------------------------------------------------------------------------------------------
5,586 551,101 $73,480,012 783 238,980 $31,864,000 6,369 790,081 $105,344,012
--------------------------------------------------------------------------------------------------------------------------------------------------------
<plus-minus> See Column (A) in PRA Table 2 noting an estimated increase of 783 annual responses to the Regulation 14A collection of information as a
result of the Rule 14a-2(b)(9)(ii) conditions.
<plus-minus><plus-minus> See Column (D) in PRA Table 2.
<plus-minus><plus-minus><plus-minus> From Column (F) in PRA Table 2.
Accordingly, we expect that our proposed amendments would allow the
affected parties to avoid these estimated burden hours and costs that
they would otherwise be subject to, absent the proposed amendments,
once Rule 14a-2(b)(9) becomes effective.
Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order
to:
<bullet> Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information would have practical
utility;
<bullet> Evaluate the accuracy and assumptions and estimates of the
burden of the proposed collection of information;
<bullet> Determine whether there are ways to enhance the quality,
utility and clarity of the information to be collected;
<bullet> Evaluate whether there are ways to minimize the burden of
the collection of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology; and
<bullet> Evaluate whether the proposed amendments would have any
effects on any other collection of information not previously
identified in this section.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
burdens. Persons submitting comments on the collection of information
requirements should direct their comments to the Office of Management
and Budget, Attention: Desk Officer for the U.S. Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and send a copy to Vanessa A. Countryman,
Secretary, U.S. Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090, with reference to File No. S7-17-21.
Requests for materials submitted to OMB by the Commission with regard
to the collection of information should be in writing, refer to File
No. S7-17-21 and be submitted to the U.S. Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736. OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication of
this proposed rule. Consequently, a comment to OMB is best assured of
having its full effect if the OMB receives it within 30 days of
publication.
V. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\146\ the Commission must advise OMB as to
whether the proposed amendments constitute a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in:
---------------------------------------------------------------------------
\146\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------
<bullet> An annual effect on the U.S. economy of $100 million or
more (either in the form of an increase or a decrease);
<bullet> A major increase in costs or prices for consumers or
individual industries; or
<bullet> Significant adverse effects on competition, investment, or
innovation.
We request comment on whether the proposed amendments would be a
``major rule'' for purposes of SBREFA. In particular, we request
comment on the potential effect of the proposed amendments on the U.S.
economy on an annual basis; any potential increase in costs or prices
for consumers or individual industries; and any potential effect on
competition, investment or innovation. Commenters are requested to
provide empirical data and other factual support for their views to the
extent possible.
VI. Initial Regulatory Flexibility Analysis
The Regulatory Flexibility Act (``RFA'') \147\ requires the
Commission, in promulgating rules under Section 553 of the
Administrative Procedure Act, to consider the impact of those rules on
small entities. The Commission has prepared this Initial Regulatory
Flexibility Analysis (``IRFA'') in accordance with Section 603 of the
RFA.\148\ It relates to the proposed amendments to the proxy
solicitation exemptions in Rule 14a-2(b) and the prohibition on false
or misleading statements in solicitations in Rule 14a-9 of Regulation
14A under the Exchange Act.
---------------------------------------------------------------------------
\147\ 5 U.S.C. 601 et seq.
\148\ 5 U.S.C. 603.
---------------------------------------------------------------------------
A. Reasons for, and Objectives of, the Proposed Action
The purpose of the proposed amendments to Rule 14a-2(b)(9) is to
address concerns about the potential adverse effects of the 2020 Final
Rules on the independence, cost and timeliness of proxy voting advice,
while still achieving many of the intended benefits of the 2020 Final
Rules with respect to the quality of the advice provided to clients. In
addition, the purpose of the proposed amendment to Rule 14a-9 is to
avoid any misperception that the addition of Note (e) to Rule 14a-9
purported to determine or alter the law governing Rule 14a-9's
application and scope, including its application to statements of
opinion. The reasons for, and objectives of, these proposed amendments
are discussed in more detail in Sections I and II above.
B. Legal Basis
We are proposing the rule and form amendments contained in this
document under the authority set forth in Sections 3(b), 14, 23(a) and
36 of the Securities Exchange Act of 1934, as amended.
C. Small Entities Subject to the Proposed Amendments
The proposed amendments are likely to affect some small entities;
specifically, those small entities that are
[[Page 67401]]
either: (i) PVABs; or (ii) registrants conducting solicitations covered
by proxy voting advice.
The RFA defines ``small entity'' to mean ``small business,''
``small organization,'' or ``small governmental jurisdiction.'' \149\
For purposes of the RFA, under our rules, an issuer of securities or a
person, other than an investment company or an investment adviser, is a
``small business'' or ``small organization'' if it had total assets of
$5 million or less on the last day of its most recent fiscal year.\150\
An investment company, including a business development company,\151\
is considered to be a ``small business'' if it, together with other
investment companies in the same group of related investment companies,
has net assets of $50 million or less as of the end of its most recent
fiscal year.\152\ An investment adviser generally is a small entity if
it: (1) Has assets under management having a total value of less than
$25 million; (2) did not have total assets of $5 million or more on the
last day of the most recent fiscal year; and (3) does not control, is
not controlled by, and is not under common control with another
investment adviser that has assets under management of $25 million or
more, or any person (other than a natural person) that had total assets
of $5 million or more on the last day of its most recent fiscal
year.\153\ We estimate that there are 660 issuers that file with the
Commission, other than investment companies and investment advisers,
that may be considered small entities.\154\ In addition, we estimate
that, as of June 2021, there were 70 registered investment companies
that would be subject to the proposed amendments that may be considered
small entities.\155\ Finally, we estimate that, as of June 2021, there
were 548 investment advisers that may be considered small
entities.\156\ As discussed above, one of the three major PVABs in the
United States--ISS--is a registered investment advisor.\157\
---------------------------------------------------------------------------
\149\ 5 U.S.C. 601(6).
\150\ See Exchange Act Rule 0-10(a) [17 CFR 240.0-10(a)].
\151\ Business development companies are a category of closed-
end investment company that are not registered under the Investment
Company Act [15 U.S.C. 80a-2(a)(48) and 80a-53-64].
\152\ See Investment Company Act Rule 0-10(a) [17 CFR 270.0-
10(a)].
\153\ See Advisers Act Rule 0-7(a) [17 CFR 275.0-7(a)].
\154\ This estimate is based on staff analysis of issuers
potentially subject to the final amendments, excluding co-
registrants, with EDGAR filings on Form 10-K, or amendments thereto,
filed during the calendar year of January 1, 2020 to December 31,
2020, or filed by September 1, 2021, that, if timely filed by the
applicable deadline, would have been filed between January 1 and
December 31, 2020. This analysis is based on data from XBRL filings,
Compustat, Ives Group Audit Analytics, and manual review of filings
submitted to the Commission.
\155\ This estimate is derived from an analysis of data obtained
from Morningstar Direct as well as data filed with the Commission
(Forms N-Q and N-CSR) for the second quarter of 2021.
\156\ Based on SEC-registered investment adviser responses to
Items 5.F. and 12 of Form ADV.
\157\ See supra Section III.B.1.
---------------------------------------------------------------------------
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
If adopted, the proposed amendments would apply to small entities
to the same extent as other entities, irrespective of size. Therefore,
we expect that the nature of any benefits and costs associated with the
proposed amendments would be similar for large and small entities.
Accordingly, we refer to the discussion of the proposed amendments'
economic effects on all affected parties, including small entities, in
Section III above.\158\ Consistent with that discussion, we anticipate
that the economic benefits and costs likely would vary widely among
small entities based on a number of factors, including the nature and
conduct of their businesses, which makes it difficult to project the
economic impact on small entities with precision.\159\ Compliance with
the proposed amendments may require the use of professional skills,
including legal skills.
---------------------------------------------------------------------------
\158\ In particular, we discuss the estimated benefits and costs
of the proposed amendments on affected parties in Section III.B.
supra. We also discuss the estimated compliance burden associated
with the proposed amendments for purposes of the PRA in Section IV
supra.
\159\ See supra Section III.C.
---------------------------------------------------------------------------
As a general matter, however, we recognize that any costs of the
proposed amendments borne by the affected entities could have a
proportionally greater effect on small entities, as they may be less
able to bear such costs relative to larger entities. For example, as
discussed in Section III.B.2, the proposed amendments to Rule 14a-
2(b)(9) could potentially reduce the overall mix of information
available to PVABs' clients as they assess proxy voting advice and make
determinations about how to cast votes. Further, as noted in Section
III.C, small institutions tend to rely more heavily on PVABs' proxy
voting advice than larger institutions because those smaller
institutions have more limited resources to conduct their own research.
As such, to the extent the proposed amendments to Rule 14a-2(b)(9)
reduce the overall mix of information available to PVABs' clients in
connection with PVABs' proxy voting advice, the costs associated by
such reduction would be borne disproportionately by smaller
institutions. That said, as discussed in Section III.B.2, we expect
that any such costs imposed on PVABs' clients would be mitigated to the
extent that PVABs currently have internal policies and procedures aimed
at enabling feedback from certain registrants before they issue proxy
voting advice. However, we request comment on the extent to which
PVABs' current internal policies and procedures would mitigate any
costs imposed on PVABs' clients as a result of the proposed amendments
to Rule 14a-2(b)(9).
We do not expect that PVABs or registrants would incur significant
costs as a result of the proposed amendments to Rule 14a-2(b)(9).
However, we request comment on how PVABs and registrants may be
affected by the proposed amendments.
Finally, as discussed in Section III.B.2. above, we do not expect
the proposed amendment to Rule 14a-9 would create any significant
costs. However, we request comment on how the proposed amendment may
affect PVABs, their clients and registrants.
E. Duplicative, Overlapping, or Conflicting Federal Rules
We believe that the proposed amendments would not duplicate,
overlap or conflict with other Federal rules.
F. Significant Alternatives
The RFA directs us to consider alternatives that would accomplish
our stated objectives, while minimizing any significant adverse impact
on small entities. In connection with the proposed amendments, we
considered the following alternatives:
<bullet> Establishing different compliance or reporting
requirements that take into account the resources available to small
entities;
<bullet> Exempting small entities from all or part of the
requirements;
<bullet> Using performance rather than design standards; and
<bullet> Clarifying, consolidating, or simplifying compliance and
reporting requirements under the rules for small entities.
The purpose of these proposed amendments is to address concerns
about the potential adverse effects of the 2020 Final Rules on the
independence, cost and timeliness of proxy voting advice, while still
achieving many of the intended benefits of the 2020 Final Rules with
respect to the quality of the advice provided to PVABs' clients. The
proposed amendments do not impose any compliance or reporting
[[Page 67402]]
requirements; rather, they would remove certain conditions for PVABs of
all sizes, including small entities. Our objectives would not be served
by establishing different compliance or reporting requirements for
small entities, exempting small entities from all or part of the
requirements, or clarifying, consolidating or simplifying compliance
and reporting requirements for small entities. Similarly, because the
proposed amendments do not set forth any standards, our objectives
would not be served by establishing performance rather than design
standards.
VII. Statutory Authority
We are proposing the rule amendments contained in this release
under the authority set forth in Sections 3(b), 14, 23(a) and 36 of the
Securities Exchange Act of 1934, as amended.
List of Subjects in 17 CFR Part 240
Brokers, Confidential business information, Fraud, Reporting and
recordkeeping requirements, Securities.
Text of Proposed Rule Amendments
In accordance with the foregoing, the Securities and Exchange
Commission proposes to amend title 17, chapter II of the Code of
Federal Regulations as follows:
PART 240--GENERAL RULES AND REGULATIONS UNDER THE SECURITIES
EXCHANGE ACT OF 1934
0
1. The general authority citation for part 240 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350;
Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106,
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
2. Amend Sec. 240.14a-2 by revising paragraph (b)(9) to read as
follows:
Sec. 240.14a-2 Solicitations to which Sec. 240.14a-3 to Sec.
240.14a-15 apply.
* * * * *
(b) * * *
(9) Paragraphs (b)(1) and (3) of this section shall not be
available to a person furnishing proxy voting advice covered by Sec.
240.14a-1(l)(1)(iii)(A) (``proxy voting advice business'') unless the
proxy voting advice business includes in its proxy voting advice or in
an electronic medium used to deliver the proxy voting advice prominent
disclosure of:
(i) Any information regarding an interest, transaction, or
relationship of the proxy voting advice business (or its affiliates)
that is material to assessing the objectivity of the proxy voting
advice in light of the circumstances of the particular interest,
transaction, or relationship; and
(ii) Any policies and procedures used to identify, as well as the
steps taken to address, any such material conflicts of interest arising
from such interest, transaction, or relationship.
Sec. 240.14a-9 [Amended]
0
3. Amend Sec. 240.14a-9 by removing paragraph e. of the Note.
By the Commission.
Dated: November 17, 2021.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25420 Filed 11-24-21; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.